Why the stamp duty cut won't stop a catastrophic house price crash

Chancellor Kwasi Kwarteng’s stamp duty changes will be heartily welcomed by struggling first-time buyers and would-be movers, desperate for some help in the face of soaring interest rates.

Kwarteng doubled the nil-rate stamp duty band to £250,000, bringing an average tax saving of £2,500 for all homebuyers and making almost half of all home moves in England tax free.

For first-time buyers, particularly in areas with high house prices, the savings are even greater. They can save a maximum of £11,250 in tax – with a new nil-rate band of £425,000, based on a higher £625,000 spend cap.

But analysts are sounding the alarm that the measures will be nowhere near enough to save the property market from a major downturn as interest rates rise.

The tax cuts will boost sales and house prices, just as rising interest rates mean the market teeters on the edge of major house price falls.

Experts are warning that the boost to demand created by the cuts will not be enough to counteract the enormous affordability crunch hitting the market, as soaring inflation pushed the Bank of England to raise interest rates by a further 0.5 percentage points on Thursday to 2.25pc.

The tax cut will stoke demand – and cushion price falls

The tax cut will partially offset the blow to the housing market caused by the cost of living crisis and rising mortgage rates, says Karl Thompson, of the Centre for Economics and Business Research, a think tank.

Previously, CEBR had forecast a 10pc year-on-year fall in transactions in 2023. Following the stamp duty cut, as well as the energy price cap guarantee, this drop will now be only 2pc, Thompson says.

Wannabe homeowners voted with their clicks: in the hour after the announcement was made, traffic on Rightmove, a property website, jumped by 10pc.

In turn, if higher numbers of homes are sold, it will soften the coming blow to house prices. CEBR’s most recent forecast was for a 4.5pc house price drop across the UK in 2023. Values are still likely to fall next year, but the drop should now be smaller, Thompson says.

In the longer term, in three or four years’ time, house price growth will be two percentage points higher because of the cut, he adds. Transactions will jump by 6pc.

Help for the markets most at risk

The stamp duty cuts could be a significant lifeline for the property markets that are forecast to record the biggest price drops.

London and the South East are where house prices are most out of kilter with earnings, and where buyers are most reliant on mortgage lending. It is here where home values – particularly at the lower end of the market – are most exposed to rising interest rates.

The cuts to first-time buyer stamp duty rates will almost exclusively target this market. On average, just 31pc of first-time buyer sales were above £300,000 in the last year, according to analysis by Hamptons estate agents – meaning the vast majority of entry-level purchasers already paid no tax. In London, however, 83pc of first-time buyer sales were above the £300,000 threshold.

“The vast majority of first-time buyers will be relatively unaffected,” says Neal Hudson, of BuiltPlace analysts. “It is London and the South East where this will have the most impact. In these more expensive areas, we will see an increase in first-time buyers.”

But the tax cuts will not be enough to counteract the threats of rate rises and the cost-of-living crisis.

House prices could rise at first – but the tax cuts cannot outweigh interest rate rises

In the next few months, the impact of the stamp duty cuts could have a psychological effect on sellers, who see the measures as a way of making more money, pushing up asking prices even higher.

“We might see effects on prices quite quickly, if sellers adjust their prices accordingly,” Thompson says.

In one case, a first-time buyer in London agreed a sale at £490,000 on Thursday, but as soon as the stamp duty cut was announced the day after, the vendor tried to renegotiate the price.

“They said they want an extra £10,000, directly based on the change in stamp duty,” says Andrew Montlake, of mortgage broker Coreco. “Their logic is the buyer is saving money and they want that money, because now they will assume that they could put the property back on the market and everything will be slightly inflated.”

But sellers are unlikely to get so lucky.

“The logic doesn’t quite work. Lenders are becoming more strict on affordability because of the cost-of-living crisis, and interest rates mean mortgage rates are rising even more, so actually people will be able to borrow less,” says Montlake.

Katie Herbert, 32, and her partner are renting while they try to buy a home in the South East. The stamp duty cut means they will save £2,500 when they purchase. But this will do little to outweigh the double hit of soaring mortgage rates and rapid house price growth that has been driven by a shortage of supply.

“On every house we have put an offer on to date, we have been outbid. We went to view a house last week in Reading with an asking price at £485,000. We offered £495,000 as we knew there were others bidding. It ended up selling at £540,000,” Herbert says.

The market is at a tipping point. House price growth has been maintained partly because buyers can lock in mortgage offers for six month periods. The 15.5pc house price growth rate recorded in July reflected sales that were agreed four or five months earlier, with mortgage offers that were issued even earlier – long before the Bank Rate hit its new high of 2.25pc on Thursday.

But these high rates are now curbing the amounts new buyers can offer on a property. “Every time we go and see a house, we ask our mortgage broker what our monthly costs would look like if we offer, and almost on a weekly basis that is going up.

“Six months ago, we had a budget of £500,000 to £520,000. Now we are looking at £475,000 to £485,000,” says Herbert.

This means rising interest rates have already cut their maximum offer by £35,000 – a drop of 7pc. That means the £2,500 tax saving will do little to help them. “If they put another zero on it, then maybe.”

Stamp duty savings will only offset a sixth of mortgage rate rises

If Thursday’s Bank Rate rise is passed on directly to mortgage rates, the monthly mortgage bill for a buyer purchasing an average UK home with a two-year fix will rise to £1,188, according to analysis by Hamptons.

This will be £294 per month more than if they had purchased with a mortgage offer in December, before the rate rises began.

Over the course of their two-year deal, this means they would pay an extra £7,056 in interest. The £2,500 saving will not go far at all: even with stamp duty cut, buying a house will cost them £4,556 more simply in interest than nine months ago.

And mortgage bills are forecast to rise even higher. Earlier this week, markets had priced in a Bank Rate peak of 4.5pc in 2023. This would push the monthly mortgage bill on an average-priced home to £1,482 – an extra £14,112 over the two-year period, which would be nearly six times more than their stamp duty saving.

Interest rates are now expected to hit 5.6pc because of this Budget

But this 4.5pc forecast is already out of date. Analysts have warned that the policies announced in the Budget will further fan inflation and in turn push the Bank of England to raise rates even higher. On Friday, after the Budget was announced, markets had priced in a Bank Rate peak of 5.6pc.

Andrew Wishart, of the analysis firm Capital Economics, says: “The market reaction to the announcement suggests that mortgage rates of over 6pc are now a distinct possibility, which would leave house prices more overvalued than in 2007.”

The stamp duty saving will help to boost buyers’ deposits because it must be paid upfront, Wishart says. “But it will be nowhere near enough to offset the hit to demand from further rises in mortgage rates. While the consensus is for house prices to flat line, we are increasingly convinced a significant correction is coming.”

In August, new buyer inquiries fell at the fastest rate recorded since April 2020, according to the Royal Institution of Chartered Surveyors, a professional body. Excluding the Covid housing market shut down, this was the biggest drop since the global financial crisis.

In September, GfK’s consumer confidence index hit -49 – the lowest rating on record since the metric began in 1974.

Forecasts of a global housing downturn

The forecasts for house price falls are part of wider expectations of a global housing market downturn, as central banks scramble to tackle soaring inflation.

Earlier this week, Jerome Powell, chair of America’s Federal Reserve, warned that America’s housing market boom would reverse, as the central bank raised interest rates by a further 0.75 percentage points.

Mortgage rates in the United States have already exceeded 6pc. Prices have not fallen yet, but sales have fallen for seven consecutive months. Capital Economics has forecast a 5pc price drop.

The super-hot pandemic-era housing markets are now feeling the crunch across the world. House prices in New Zealand fell by 11pc between their peak in November and July, according to the Real Estate Institute of New Zealand. Capital Economics has forecast a 20pc drop in Canada, a 15pc drop in Australia, and a 10pc to 15pc fall in Sweden – to name a few.

Should the tax cuts have gone further?

Kwarteng’s move roughly brought the nil-rate bands in line with house price growth since they were last changed (the £125,000 nil-rate was set in 2006 and the first-time buyer nil-rate was introduced in 2017).

But the Chancellor did not adjust the higher bands accordingly. Instead, the lowest stamp duty band has been wiped out. This means that the lowest rate is now 5pc, when previously it was 2pc.

Many are underwhelmed by the tax cuts. Matt Henderson, of Strutt & Parker estate agents, is calling for a much larger overhaul.

“A full restructuring of the system is needed in order to further reduce the barriers for first-time buyers entering the market and to create liquidity around downsizers releasing underutilised stock back into the market.”

Richard Donnell, of property website Zoopla, says: “If we are to significantly mobilise the housing market, greater changes are needed to offset the impact of higher mortgage rates.”

Kwarteng should have gone much further, says Hudson.

“We are rapidly moving beyond a point where £2,500 or even £5,000 makes much difference,” says Hudson.

“Stamp duty is a stupid tax, but these changes are slightly underwhelming. A lot of people were expecting something much bigger. The Government estimates these changes will encourage 29,000 more people to move house. That's almost nothing.”