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Will a stamp duty cut fix the housing crisis?

Liz Truss’s reported plan to slash stamp duty comes as house prices hit record highs but homeowners are feeling the squeeze of rising interest rates

stamp duty

Liz Truss is reportedly hoping a stamp duty cut will boost the economy. Image:Andrew Parsons / No 10 Downing Street

Liz Truss is rumoured to be considering introducing a stamp duty holiday as one of her first acts as prime minister.

The new prime minister is planning to unveil the move as part of the government’s mini-budget on September 23, The Times has reported.

Truss believes the stamp duty cut will support the housing market as part of her wider plan to grow the economy, it is claimed.

It’s the second time the Conservative government has acted to reduce stamp duty in response to a crisis in the last three years. Rishi Sunak did the same in 2020 as Covid lockdowns sent the property market into sharp decline. The then-chancellor scrapped stamp duty on properties up to £500,000 before it was gradually phased out by September 2021.

The measure contributed to a spike in demand that has sustained beyond lockdowns and house prices are now rising at record rates. Since the last stamp duty holiday, house prices have risen on average by 15 per cent, according to Rightmove.

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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 higher than at the same time last year.

The record rises are forecast to come to an end with the cost of living crisis starting to bite homeowners. The Bank of England’s strategy of raising interest rates to combat rising inflation has also seen mortgage rates increase.

So will Truss’s plan work? Let’s take a look.

How much is stamp duty in the UK?

Stamp duty is a property transaction tax paid by the home buyer. The amount paid for the property determines how much stamp duty land tax is paid.

If a home costs less than £125,000 there is no stamp duty to be paid in England and Northern Ireland. The stamp duty rate is 2 per cent between £125,001 and £250,000, 5 per cent across the next 675,000, 10 per cent on the next £575,000 and 12 per cent on anything above £1.5million. First-time buyers do not pay stamp duty up to £300,000.

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

In Wales, it’s 0 per cent stamp duty up to £180,000, then 3.5 per cent between £18,001 and £250,000, 5 per cent up to £400,000, 7.5 per cent to £750,000, 10 per cent to £1.5m and 12 per cent on a property above £1.5m.

All these rates only relate to a person’s main residence and increase for additional properties.

The government has a stamp duty calculator to work out how much is paid on a property.

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

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

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

Who benefits from a stamp duty holiday?

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

Rightmove’s property expert Tim Bannister said a stamp duty tax cut is likely to 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 rising demand.

However, Bannister added: “If the cuts benefit homes in higher price brackets it would help those trading up more than it would help first-time buyers. With rising interest rates and cost of living it could be welcome to those looking for a bit more buffer to find the home they want, but if prices rise further then that extra money could quickly be swallowed up.

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

Will a stamp duty holiday tackle 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 purpose is chiefly to increase demand in the market but the problem many people face when it comes to finding a place to live is the lack of affordable housing.

That is the result of years of subsequent governments failing to build enough homes while social housing lost through the Right to Buy scheme has not been replaced. Short-term lets and holiday lets have also eaten into housing supply.

There are less homes on the market available to buy. Rightmove reported the amount of available stock on the market was down 39 per cent on 2019 levels as of August.

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

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

“As borrowing gets more expensive, the market was already looking like it would shift towards higher income, wealthier borrowers and away from first time buyers,” said Hudson. 

“Changes to stamp duty could accelerate this by further reducing the cost of buying for investors/second home buyers.”

There is a strong recent example of what a stamp duty cut can do to the market. The record prices currently being experienced in the housing market are partly down to Sunak’s stamp duty cut during the pandemic alongside low interest rates and the race for space as people move home after lockdowns.

Sunak’s stamp duty cut was intended to target the mid- to lower-end of the housing market with no tax paid on properties under £500,000 in England in 2021.

The holiday increased the number of transactions in the bands above the tax-free limit in early 2021, according to Hudson. There was a surge across all levels between March and June as the tax-free limit was reduced to £250,000 from July to September in England.

Hudson concluded the stamp duty holiday was a tax cut for the top earners.

He’s not the only one who shares the view that cutting stamp duty will do little to help the underlying issues behind the housing crisis.

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

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

“The prime minister and chancellor rightly want to prioritise growth. But they should deliver that in a much more sustainable way by investing in building enough houses, not funding widespread stamp duty cuts. Using the tax system in this way will pump up house prices which will only exacerbate the problems faced by first time buyers.”

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