How Will The Stamp Duty Cut Impact Property Prices?

The recent announcement by Kwasi Kwarteng, the new chancellor, introduced an array of tax cuts in the hope of stimulating economic growth.

Amongst those were a number of cuts to stamp duty aimed at providing a boost to the property market. Despite strong growth in both property sales and property values over the last few years, recent interest rate rises and the growing cost of living have begun to cause the property market to slow.

Why was stamp duty cut in the budget?

The chancellor hopes that by cutting stamp duty, he will reverse the slump. To do this he has increased the level at which house-buyers begin to pay stamp duty. It has now doubled from £125,000 to £250,00.

In addition, first-time buyers will benefit from a stamp duty cut where they will now pay no stamp duty on homes worth £450,000, up from £300,000.

These cuts come into force immediately meaning we could see a sudden rush in the property market, stimulating the sale and purchases of property. In announcing the cut, the chancellor said:

“The steps we’ve taken today mean 200,000 more people will be taken out of paying stamp duty altogether.”

The overall thought is that this move will cause more movement in the property sector and see the economy sparked into life a little more through one of its key assets.

What does the stamp duty cut mean?

In essence, it means that more people will be able to start their journey on the property ladder with less initial expense.

It is hoped this cut could delay or even remove the anticipated slowdown in the housing market as interest rates rise. Furthermore, it is hoped that this move will help more people get on the property ladder. In a time when rents are rising and hope of securing a property of your own seems to get smaller every day, this reduction in stamp duty, and its removal in some cases, could be what is needed to stimulate a market and help people achieve their property goals.

It isn’t all great reading though and some people have doubts.

Could the stamp duty reduction be bad news?

Unfortunately, as with anything, there are both pros and cons. The pros in this instance seem watertight but experts fear the cons could be very detrimental.

Critics of the stamp duty cut argue the move will push house prices higher, worsening inflation and pricing first-time buyers out of homes. Putting us, therefore, back into a situation similar to before the cut. This would mean nobody gets to benefit from a move aimed at benefiting people.

Property prices increasing and affecting first-time buyers is a very real possibility, the mini-boom brought about by the Stamp Duty holiday during Covid has given way to a property market defined by high demand, low supply and a mostly uninterrupted monthly increase in prices.  That being said, by Q3 2022 there were signs this was slowing.

Will stamp duty cuts see house prices rise?

We have referred to the concerns that critics have laid at this plan in the paragraph above but to assume that a cut to Stamp Duty will allow prices to continue rising as they have been, could be short-sighted.

The British Economy is in a vastly different position compared to 2020. The cost-of-living crisis and rising interest rates have substantially affected the purchasing power of British buyers. Many industry figures were predicting a moderate to severe reduction in prices by 2023, fueled by lower demand from less financially secure buyers.

During the Covid stamp duty holiday, some price caps were seen to form around the different price thresholds for SDLT savings, assuming this is repeated, this would act to hold prices from rising past certain levels in some cases, although this is likely to be inconsistent.

What about the cost of living and interest rates?

While the Stamp Duty Holiday will undoubtedly stimulate the property market, the extent of its effect on demand and prices will be tempered by the rising interest rates brought in by the Bank of England to curb inflation.

Since Covid’s effect on world trade has waned, economies have been bolstered by an increase in spending. Higher demand for goods has led to shortages of supply and rising costs as a result. Oil and Gas in particular have rocketed in price, exacerbated by the War in Ukraine, which has also affected the availability and price of many staple foods worldwide.

Effectively, higher interest rates curb this demand and should lower prices. This is achieved by encouraging people to borrow less money while incentivising spending less capital. As of the date of this article’s publication, interest rates are at 2.25%, vastly higher than the 0.1% seen last year.

As well as increasing the monthly costs of the roughly 2 million people with a variable mortgage, higher interest rates have a substantial effect on the affordability of borrowing for first-time buyers getting on the property ladder.

Rising rates causing higher-interest mortgages was a major contributor to slowing growth in the market, a trend expected to continue and increase into 2023.

However, with the Chancellor’s cuts to stamp duty in place, savings on stamp duty should reduce the impact of these higher interest mortgages on peoples’ wallets. It could be that first-time buyers are the real winner. Unfortunately, they will still have to accept costlier mortgages but they will be saving up to £11,250 on their stamp duty bill.

While slashing stamp duty will give the property market an immediate boost, any increase will be tempered by these rising interest rates.

Will the stamp duty cut accelerate a property boom?

In short, don’t expect a repeat of the property boom brought about by Rishi Sunak’s stamp holiday. This is a permanent change, not a holiday. As a result, buyers will feel less pressure to act now.

Sunak’s holiday also came about during the Covid pandemic, a time of immense social change that saw a ‘race for space’ away from major cities driving values up at almost unprecedented speeds. A combination that saw property transactions rise by a staggering 49%.

The British Economy is also in a very different position to two years ago, even with the pandemic behind us, the future is uncertain, and with the war in Europe and widespread economic uncertainty, it would be naive to expect buyers to be as confident as they were in previous years. In previous months, economic forecasts were consistent in their belief that the property market would face a dramatic correction in prices as demand weakens, with the Guardian asking if we were heading ‘off a cliff’

Whether or not the market still careens off this cliff is hard to predict, global events are fickle. But we can say with confidence that the Chancellor’s mini-budget will soften the landing. While the market is likely to see a correction in prices in future, the extent of any reduction in values or even crash has been effectively reduced.

If you have any questions about stamp duty, we have produced several guides, including our recent insight on stamp duty and inherited property. At Gaffsy we understand the concerns people have over a property sale and purchase. That is why we operate as a cash house buyer, it allows for a fast sale with no fear of all the complications associated with a traditional house sale. With the market potentially moving at a fast pace following the chancellors announcement, speak to us today, we can give you free cash valuation so you can take advantage of the best prices for your property.