Housing crisis

Will a reduction in stamp duties solve the housing crisis?

The most recent monthly figures from the Office for National Statistics showed the average UK house price was £292,000 in July. That’s £39,000 more than the same time last year.

Record increases are set to end as the cost of living crisis begins to bite homeowners. The Bank of England’s strategy of raising interest rates to fight rising inflation also led to higher mortgage rates.

So, will Truss’ plan work? We’ll take a look.

How much is UK stamp duty?

Stamp duty is a tax on real estate transactions paid by the buyer of the home. The amount paid for the property determines the amount of property tax paid.

If a house costs less than £125,000, there is no stamp duty to pay in England and Northern Ireland. The stamp duty rate is 2% between £125,001 and £250,000, 5% on the next 675,000, 10% on the next £575,000 and 12% on anything over £1.5 million. First-time buyers pay no stamp duty up to £300,000.

In Scotland there are different thresholds with 0% on homes up to £145,000 or £175,000 for first-time buyers. This increases to 2% up to £250,000, 5% up to £325,000, 10% up to £750,000 and 12% above that figure.

In Wales it is 0% stamp duty up to £180,000, then 3.5% between £18,001 and £250,000, 5% up to £400,000, 7.5% up to at £750,000, 10% up to £1.5m and 12% cent on property over £1.5m.

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All these rates only concern a person’s main residence and increase for ancillary goods.

The government has a stamp duty calculator to calculate the amount paid on a property.

The average stamp duty a mover – excluding a first-time buyer – currently pays is £8,258, according to Rightmove.

Just 7% of homes on the UK market are exempt from stamp duty for movers, compared to 45% of homes for first-time buyers.

If Truss were to reduce stamp duty on all properties by up to £500,000, it would mean three-quarters of properties in England would be exempt from stamp duty, the property site’s experts added.

Who benefits from a stamp duty holiday?

It depends on the details of the announcement, which is expected on Friday.

Rightmove property expert Tim Bannister said a stamp duty reduction would likely be welcomed by buyers as it would reduce the cost of moving.

Meanwhile, sellers may be encouraged to list their property to make the most of the growing demand.

However, Bannister added: ‘If the discounts benefit homes in the higher price brackets, it would help those who are exchanging more than it would help first-time buyers. With interest rates and the cost of living rising, it could be welcome for those looking for a bit more buffer to find the home they want, but if prices rise further, that extra cash could quickly be engulfed.

“The impact on supply, demand and ultimately prices will depend on the details, including whether it will extend to second home buyers and investors.”

Will a stamp duty holiday solve the housing crisis?

Ultimately, a stamp duty holiday is a demand-side solution to a supply-side problem when it comes to the housing crisis. The main objective is to increase demand in the market, but the problem that many people face when it comes to finding accommodation is the lack of affordable housing.

This is the result of years of subsequent governments failing to build enough housing while the social housing lost to the right to buy program has not been replaced. Short-term rentals and vacation rentals also ate away at housing supply.

There are fewer homes available for purchase on the market. Rightmove said the amount of stock available in the market was down 39% from 2019 levels in August.

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It is likely that Truss’ stamp duty holiday could drive prices up further at a time when they are currently already out of reach for many. Analysis by Neal Hudson, a housing expert for Built Place, found house prices were overvalued by 17% in July based on figures from the Office for National Statistics and the Bank of England.

He said the stamp duty holiday would likely drive homes away from first-time buyers and into the hands of the wealthy.

“As borrowing becomes more expensive, the market already seemed to be shifting towards higher incomes, wealthier borrowers and away from first-time buyers, Hudson said.

“Stamp duty changes could accelerate this by further reducing the cost of purchase for second home investors/buyers.”

There is a recent example of what a stamp duty reduction can do for the market. The current record prices in the housing market are partly due to Sunak’s stamp duty cuts during the pandemic, low interest rates and the race for space as people move out after lockdowns.

Sunak’s stamp duty cut was intended to target the middle and bottom end of the tax-free housing market paid on properties under £500,000 in England in 2021.

The holidays increased the number of transactions in brackets above the tax-exempt limit in early 2021, according to Hudson. There was an increase across the board between March and June, with the tax exemption limit reduced to £250,000 from July to September in England.

Hudson concluded that the stamp duty exemption was a tax reduction for higher earners.

He is not alone in sharing the view that stamp duty cuts will do little to solve the problems underlying the housing crisis.

Leeds Building Society chief executive Richard Fearon said the move was a “short-term quick fix” that cannot replace efforts to boost supply.

“Reducing stamp duty rates across the board would just be another short-term quick fix that will ultimately make the housing crisis worse, not better,” Fearon said.

“The Prime Minister and the Chancellor rightly want to prioritize growth. But they should achieve this in a much more sustainable way by investing in building enough homes, not by funding across-the-board stamp duty reductions. Using the tax system in this way will drive up house prices, which will only exacerbate the problems faced by first-time buyers.