Stamp Duty Cut: Who does it help

The chancellor last week announced a permanent stamp duty reduction for property purchases in England and Northern Ireland. Under the new system, the first £250,000 of a property's value will be exempt from stamp duty. For first-time buyers, the threshold will increase to £425,000. Previously, no stamp duty was paid on the first £125,000 of the property's price and £300,000 for first-time buyers.

Rightmove estimates that raising the threshold to £250,000 means that 33 per cent of all homes currently on sale will be exempt from stamp duty. It compared previously to only 7 per cent when the threshold was £125,000. It also estimates that 66 per cent of all first-time buyers will be exempt. The last time the stamp duty was cut at the start of the pandemic caused frantic demand increase, leading to house prices increasing at a record rate.

However, Tim Bannister of Rightmove believes that since the cut to stamp duty is permanent, the increase in demand for housing should be steady compared with the last time a stamp duty cut was announced, as that was a temporary cut for a specific period. Furthermore, he adds that rising mortgage rates will also balance the impact on demand. Demand has been softening over the last few months, but the cut in stamp duty could stimulate more demand, according to Rightmove.

So, who does the stamp duty holiday benefit the most? We look at areas and the type of buyers likely to benefit the most from the cut in stamp duty and if the stamp duty will have the desired effect that the government hopes.

London and the Southeast:

According to an analysis by Hamptons, London and the Southeast are where house prices are most out of sync with earnings, and buyers rely on mortgage lending. It is where home values particularly at the low end are most exposed to interest rates rise. The cuts to first-time buyers' stamp duty rates will target this market. Furthermore, the report adds that on average, just 31 per cent of first-time buyers' sales were above £300,000 in the last year. Compare that with London, where 83 per cent of first-time buyer sales were above the £300,000 threshold.

As the graph below also highlights last time the stamp duty was cut in 2020, the two regions that benefited the most were London and the Southeast. The savings across the two regions were more significant than any other region of England, and the latest set of stamp duty cuts is likely to favour these two regions of England the most.

Increase housing market activity

The stamp duty cut will partially offset the blow to the housing market caused by the cost-of-living crisis and rising mortgage interest rates, says Carl Thomson of the Centre for Economics and Business Research (CEBR). CEBR previously predicted that transactions would fall by 10 per cent year on year in 2023. It now forecasts a drop of only 2 per cent because of stamp duty cut and energy price cap guarantee.

Rightmove reported a surge in traffic on their website by 10 per cent after the chancellor announced the stamp duty cut. However, experts warn that the boost to demand created by the cuts to stamp duty will not be enough to counteract the enormous affordability crunch hitting the market. Soaring inflation and the huge tax cuts announced in the mini-budget will push the Bank of England (BOE) to raise interest rates above 2.25 per cent. Experts now predict that rates might be as high as 6 per cent by early next year.

Stamp Duty cut benefits seem to disappear.

As a result of the mini-budget, the pound has fallen to record lows against the dollar, prompting fears that BOE will have no choice but to raise the base rate even further. According to The Times, HSBC and Santander both suspended new mortgage deals on Tuesday of last week, and Nationwide became the first big lender to raise fixed rate mortgage rates, with the two-year fixed rate rising to 5.59 per cent. Three months ago, a comparable mortgage had a rate of 2.54 per cent. Analysts at Credit Suisse warned that a combination of higher interest rates, inflation and a risk of a recession could lead to house prices falling by between 10 and 15 per cent.

This might be the first time in history that a stamp duty cut has resulted in a house price falling. The next few months for the housing market will be incredibly bumpy unless the plan laid out by the government in the mini-budget starts to work. Hold on tight; the housing market is in for a ride.