Opinion: Stamp Duty cut madness will only push house prices up

The new chancellor’s move to cut Stamp Duty is the last thing we need as it will simply boost demand even further, argues John Fitzsimons

There wasn’t an awful lot ‘mini’ about last week's mini-Budget from new Chancellor Kwasi Kwarteng.

One of the many big announcements, leaked a couple of days in advance, was that Stamp Duty would be revamped.

Stamp Duty is a tax that we pay when buying property, and is an important consideration for anyone hoping to move home.

Previously, no tax was payable on the first £125,000 of a transaction, but Kwarteng has elected to double this tax-free band to £250,000.

So what difference would that make to a house purchase?

Under the old system, if I bought a property for £300,000, I’d pay no tax on the first £125,000 of the deal, 2% on the portion of the transaction between £125,001 and £250,000 and then 5% on the portion between £250,001 and £300,000.

That would have meant a tax bill of £5,000.

However, the new system has essentially scrapped that second tier of Stamp Duty bands, meaning I’d pay no tax on the first £250,000, and then 5% on the remaining £50,000. That works out at a tax bill of £2,500.

Crucially of course, if I bought a property for under £250,000 I’d now avoid paying Stamp Duty altogether.

On top of that, there’s a separate boost that applies to first-time buyers. Previously they did not pay Stamp Duty on the first £300,000 of a transaction, but that’s being ramped up to £425,000.

Clearly, this sort of tax break is going to have an impact on how attractive the idea of buying a house is, and in my view, it’s going to make a pre-existing problem far worse.

Learning from history

The incredible thing here is that we don’t have to look too far back to see what happens when Stamp Duty is reduced, and the way that it boosts demand.

One of the first measures introduced by the Government at the outset of the pandemic was the introduction of the Stamp Duty holiday.

The idea was that with everyone told to stay at home, we were less likely to go out looking at new properties, but that this could be overcome if the additional costs of Stamp Duty were not such a concern.

And it certainly worked, leading to an enormous increase in activity. Of course, the problem in the UK housing market has long been that we don’t have enough homes to meet demand, and so the Stamp Duty holiday only exacerbated this issue.

That imbalance between supply and demand led to rocketing house price growth, which hasn’t really slowed even though the Stamp Duty holiday concluded last year.

In fact, according to the latest house price index from the Office for National Statistics, house prices in the last 12 months have jumped by an astonishing 15%. 

And since the onset of the pandemic, the average value of a property has rocketed from around £230,000 to a whopping £292,000.

I can’t afford to buy a house

For decades successive Governments have talked a good game about increasing the rate of new housebuilding in order to match the levels of demand. Unfortunately, all too often that talk has not been matched by action.

Indeed, the last Conservative Government introduced an annual target of 300,000 new homes, but we are nowhere near managing that ‒ last year just over 180,000 new homes were completed for example.

So long as supply fails to keep up with demand, house prices will only continue to increase. 

And that makes it ever more difficult to prospective buyers to save a sufficient deposit.

That’s the whole reason we have had various schemes over the years aimed at helping people purchase a home even if they don’t have much in the way of savings, such as the Help to Buy scheme. 

Yet all these schemes ever do is support more demand ‒ which in turn just drives prices ever higher ‒ rather than addressing the underlying issue of supply.

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What about borrowing costs?

It’s even more striking that the Government is deciding to do this at a time of rising costs, meaning the mortgages needed in order to get onto the housing ladder are going to be even more expensive.

We’ve seen a handful of increases to the Bank Base Rate since Christmas already ‒ just this week the Bank of England increased Base Rate to 2.25%, and with inflation still incredibly high it seems inconceivable that there won’t be further hikes on the way.

We have already seen notable increases to the interest rates lenders are charging on mortgages ‒ are we going to see increased numbers of borrowers stretching themselves to lock into home loans in order to clinch that purchase?

This way madness lies

It boggles my mind that, of all the areas of the economy that the Government could focus its attention, it has decided to artificially stimulate demand for homes.

The one area of the housing market that doesn’t need help is demand.

People still want to buy their own home - even with the cost of living crisis - yet that ambition will only move further out of reach if house prices are given yet another unnecessary boost.

Time and time again Governments seem to decide that the way to improve the housing market is to come up with new ways to boost demand, and time and time again they seem shocked that this doesn’t actually make home ownership more achievable for many.

Kwarteng promised that this was a “new era”, yet it’s the same old approach to the housing market.

And it stinks. 

What do you think? Was the Stamp Duty cut a good or bad move by the Government? Share your thoughts in the comments section below.