Stamp duty cuts will hurt first-time buyers and cause an inflationary bubble in the property market as house prices rise at the fastest rate in nearly 20 years, the government has warned.
Chancellor Kwasi Kwarteng is preparing to introduce radical cuts to stamp duty as the “rabbit out of the hat” of his mini-budget, the Times reported, detailing tax cuts by Prime Minister Liz Truss. Friday in the House of Commons.
However, economists and property experts say measures to bolster an already red-hot housing market will benefit the wealthy the most and risk pricing out first-time buyers.
It comes less than a year after the stamp duty cuts used by former chancellor Rishi Sunak during the Covid pandemic expired, which analysts said mainly benefited London and the south-east and had little impact elsewhere across the UK.
“This is bovine short-termism at its worst,” said Louise Shaw, founder of Mansfield-based Shaw Financial Services. “This move will push home prices higher, worsen inflation and further price first-time buyers out of home ownership.
“If someone asked me how to push an already overheated property market into dangerous bubble territory and make things worse for everyone, this would be the policy.”
Stamp duty is paid by purchasers of land or property in England and Northern Ireland, with higher rates above certain thresholds. Separate land taxes apply in Scotland and Wales.
Reports of a possible cut in shares of Britain’s housebuilders sent the blue-chip index on the London stock market on Wednesday morning, with FTSE 100 firms Barrett, Persimmon, Taylor Wimpey and Barclays – among its top performers – up 3% to 6%.
UK average Home prices rise 15.5% July to July, the highest annual inflation rate since May 2003, according to official figures.
Many economists call the stamp duty “bad taxBecause it discourages mobility, it is paid by home buyers rather than sellers. Several experts have called for sweeping changes to the way property is taxed, including changes to the council tax system.
Cutting stamp duty could help offset a potential slowdown in the housing market as the Bank of England raises interest rates, with borrowing costs expected to hit 4.5% next year, adding to financial pressure on homebuyers.
However, analysts warn that without broader reforms, as well as efforts to boost housing supply, the measure will fuel inflation while doing little to benefit those struggling to get on the housing ladder.
“As borrowing became more expensive, the market already looked like it would shift away from high-income, wealthy borrowers and first-time buyers,” said Neil Hudson, a property market analyst. “Changes in stamp duty could accelerate this by further reducing the cost of purchase for investors [and] Second Home Buyers.”
The duty cuts will also come with a hefty price tag, at a time when the government is preparing to cut billions of pounds in taxes on business profits, national insurance and frozen energy prices. Across the UK, property transaction tax brings in more than £15 billion a year for the Exchequer.
Truss has argued that getting the economy moving is his primary focus, over and above the immediate impact of his policy measures on the rich or the poor.
Measures to stimulate the housing market can encourage greater economic activity by increasing demand for related goods and services such as estate agents, solicitors, removals, building trades, furniture and white goods.
However, experts said the introduction of a new tax break soon after Sunak’s stamp duty holiday would limit its impact. In addition to the rush for more relocations during the Covid pandemic, the stamp duty holiday spurred a 43% increase in property transactions last year.
A report this summer by the Organization for Economic Co-operation and Development found that the UK’s property tax is outdated and favors the wealthy elite. It has warned that efforts to spur economic growth by lowering property transaction taxes are driving prices sky high.
Sarah Coles, a senior personal finance analyst at Hargreaves Lansdowne, said: “The only reason these holidays work is because people think they have a small window of opportunity to take advantage, otherwise they’d miss out. At the point where they think they can wait for the next one, they start to become less effective.
“Even if it does stimulate demand, it ignores the fact that there is a serious shortage of real brake supply in the property market.”