Will stamp duty cut push UK house prices up even further?

·Reporter
·5-min read
Experts says a cut in stamp duty could further push up house prices. Photo: Matt Crossick/Empics
Experts says a cut in stamp duty could further push up house prices. Photo: Matt Crossick/Empics

UK chancellor Kwasi Kwarteng is expected to announced a cut in stamp duty to encourage economic growth by allowing more people to move and enabling first-time buyers to get on the property ladder.

Prime minister Liz Truss has previously said that slashing the levy is "critical" to economic growth.

The stamp duty threshold was increased temporarily to £500,000 during the pandemic to help stimulate the property market.

Read more: Pound falls below $1.13 after US Fed and Bank of England rate hikes

The measure introduced by former chancellor Rishi Sunak saw spikes in demand during the holiday as buyers rushed to maximise their savings.

However, the COVID-era housing boom has shown no signs of letting up yet, despite rising interest rates.

Read more: Interest rates: How BoE's rate hike will impact mortgages and house prices

According to the most recent Office for National Statistics (ONS) figures, the average UK house price jumped by 15.5% in the 12 months to July 2022, marking the biggest increase in 19 years.

The average house price was £292,000 ($330,000) in July – £39,000 higher than at the same time last year.

That leap in annual inflation was mainly because of "a base effect" from the falls in prices seen this time last year, as a result of changes in the stamp duty holiday, the ONS said.

UK inflation remains near 40-year highs, and is forecast to peak at above 13% in October, and the Bank of England is tipped to deliver its largest rates rise in 33 years.

So how will a cut in the stamp duty land tax impact house prices?

Chancellor Kwasi Kwarteng is set to deliver his first fiscal event on Friday. Photo: Rob Pinney/Getty Images
Chancellor Kwasi Kwarteng is set to deliver his first fiscal event on Friday. Photo: Rob Pinney/Getty Images

What is stamp duty?

Stamp duty is a tax buyers have to pay if they buy a residential property or a piece of land in England or Northern Ireland over a certain price.

It is paid on residential properties costing more than £125,000, unless you qualify for first-time buyers relief.

The tax applies to both freehold and leasehold homes, whether you’re buying outright or with a mortgage.

Read more: How BoE's interest rate hike will impact mortgages and house prices

First-time buyers will pay no stamp duty on houses costing up to £300,000, and a discounted rate on property purchases up to £500,000.

But those investing in a second property, will still pay an extra 3% stamp duty on homes costing over £40,000.

While people moving up the chain currently pay 0% from £0-£125,000, 2% on the portion of the sale between £125,001 and £250,000 and between 5% on the portion of the sale between £250,001 and £925,000.

For those buying properties at the priciest end of the scale: the part of the sale between £925,001 to £1.5 million is taxed at 10%. Over that amount the tax hits 12%.

Watch: Stamp duty cut: rumoured property tax cut in Friday’s mini-Budget could push up mortgage bills

What is happening in the housing market?

The UK property sector is currently in a market where demand is outstripping supply, resulting in bidding wars and in turn causing house price rises.

The Bank of England's interest rate plays a key role in this. The lower the Bank Rate is, the lower the cost of borrowing, meaning more people will be able to take out a mortgage, which means more buyers.

On the opposite end, the higher the rates are, the more expensive it will be to borrow, meaning that fewer people will be able to buy a house.

Threadneedle Street is set to announce its latest interest rate decision on Thursday.

Read more: UK is already in a recession, new data from Bank of England indicates

How will a cut in stamp duty impact house prices?

Kwarteng is reportedly considering drastic plans to reduce the tax paid by homebuyers in his emergency mini-Budget on Friday.

Experts have warned that potential cuts to stamp duty could risk "doing more harm than good".

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown said stimulating housing market demand could further push up house prices, at a time when the supply of available homes is already tight and mortgage payments are rising due to higher interest rates.

She said: "You can see why the government is concerned about the housing market, because there’s a risk that rising mortgage rates and rising prices will dampen buyer enthusiasm. We know from recent experience that a stamp duty holiday effectively stimulates demand.

"No buyer will ever complain about a tax cut, but if the government was to cut stamp duty it would mean ignoring the fact that the real brake on the property market is a severe shortage of supply.

"Stimulating demand without addressing supply problems would risk more buyers chasing a tiny number of properties, which would push prices up. It’s what we saw during the coronavirus-inspired stamp duty holiday."

Richard Fearon, chief executive of Leeds Building Society, added: "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.

"Governments have successively resorted to quick-fix solutions to increase demand rather than address the structural flaws in the housing market and ensure there is enough supply."

Watch: Will UK house prices ever fall?