Market News

Prime minister Liz Truss’ plans to cut stamp duty could unlock the housing crisis and boost sales despite soaring mortgage bills, experts said.

The Government is reportedly planning to announce a cut to the property transaction tax in the mini-Budget on Friday, as part of chancellor Kwasi Kwarteng’s brief to boost growth.

Tom Clougherty, of the Centre for Policy Studies, a think tank, said the move would boost house sales, enable a more efficient use of the country’s housing stock by removing a key barrier to downsizing, and increase housebuilding long-term.

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“It would be a watershed moment for the housing market. It will liberate supply and boost productivity,” Mr Clougherty said.

Research by the CPS found that housebuilding rates respond directly to transaction levels, with developers historically building one home for every 8.5 transactions. This is because housebuilders increase their output when they are more confident that they will be able to sell homes quickly.

“The Government could cut stamp duty and the tax revenue wouldn’t necessarily fall, because it will encourage more moves and in turn more housebuilding,” Mr Clougherty said.

Dominic Agace, chief executive of Winkworth estate agents, added: “Downsizers will be encouraged to make their moves so the housing ladder will be unblocked. With more movers, it also means the overall government tax take will increase.”

There is so far no detail on what form the stamp duty cut will take, but analysts expect a permanent raise in the nil-rate band. Some have speculated that the bands could be adjusted to reflect rates of house price growth. Others anticipate a much larger change to mirror then-chancellor Rishi Sunak’s stamp duty holiday during the pandemic.

Matthew Lesh, of the Institute of Economic Affairs, a think tank, said Ms Truss could increase the nil-rate band to £500,000 or even £1 million.

He said: "If they are going to do something I would expect something substantial with the nil-rate threshold rather than fiddling with exemptions."

The move would encourage large numbers of older homeowners to move and free up family homes for younger buyers, Mr Lesh added. “Stamp duty contributes to a massive misallocation of housing. It disincentivises downsizing because of the moving costs, which means that other people can’t upsize. A cut would free up the housing market, and get more people selling and moving.”

But analysts warned that reducing buyers’ moving costs could bring unsustainable house price inflation in the short-term. Andrew Wishart, of Capital Economics, an analyst, said: “By offsetting the rising cost of mortgages, a stamp duty holiday could extend the house price boom by a few months, but that would take prices to a level where a correction would be inevitable.”

A stamp duty cut would fire up demand at a time when the housing market is looking increasingly shaky. In August, new buyer inquiries plunged at the fastest rate recorded since the housing market was shut down during spring 2020, according to the Royal Institution of Chartered Surveyors, a professional body.

Excluding the lockdown period, this was the biggest drop since the global financial crisis.

Demand is likely to fall even further, following the Bank of England’s anticipated interest rate rise today which will further inflate already soaring mortgage costs. Capital Economics and HSBC, a lender, have forecast national house price falls of 7pc and 7.5pc respectively.

Richard Donnell, of property website Zoopla, said: “A major move is needed from the Government to offset the impact of mortgage rates which will more than double this year.”

Mortgage rate rises will also hit London and the South East hardest, because high house prices mean the market is more dependent on borrowing, Mr Donnell said.

This is also the part of the country where the property market is most affected by stamp duty. The stamp duty banding system means that a buyer’s tax bill escalates disproportionately as homes become more expensive.

A buyer purchasing an average home in London in July paid £17,176 in stamp duty – roughly 22 times the £765 bill on an average home in the North East.

Homes priced at £500,000 and above account for 76pc of the Treasury’s tax take, with two-thirds of receipts coming from London and the South East alone, Mr Donnell said.

“Stamp duty is a tax on home buying in southern England and constrains the movement of buyers at the upper end of the market from moving or getting on the property ladder,” he added.

Much of the impact on the market will depend on the scale of the tax cuts. Lucian Cook, of Savills estate agents, said the Government may not be able to achieve its aims of offsetting the impact of the cost of living crisis and higher mortgage bills on house prices and transactions.

He said: “Realistically, it seems unlikely that the Government will be able to implement stamp duty changes that outweigh these two overriding factors. Certainly, they would have to do much more than simply increase stamp duty thresholds in line with recent levels of house price growth."