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Latest stamp duty changes and what this means for the UK housing market

Daryl Perry • 23/09/2022

What do the changes to stamp duty mean for the housing market?

In the mini-budget on Friday 23rd September 2023, Kwasi Kwarteng announced changes to the way stamp duty will be calculated, meaning buyers will now pay less tax. This fiscal policy aims to maintain the relatively high levels of buyer demand we have seen since summer 2020. A cut to Stamp Duty Land Tax (SDLT), alongside a cut in national insurance and a cap on energy prices – which protect household income, should in theory encourage liquidity in the housing market and put upward pressure on house prices.  

The cut to SDLT is part of the mini-budget aimed at kickstarting growth in the economy – a tried and tested government approach in recent decades. The big question, however, is over timing, with fiscal and monetary policy seemingly at odds. The Bank of England’s priority right now is clearly to control inflation through a series of interest rate rises. Supporting house price growth will not help bring inflation back down to the target of 2%.


How is the housing market doing?
A stamp duty holiday and a race for space caused housing market demand to surge from summer 2020. House prices are now 27% higher than pre-pandemic levels (February 2020) (Nationwide).  

There have been some early indicators of a slowdown in housing market demand. In July / August 2022, Zoopla reported buyer demand was 17% higher than the 5-year average. This is down from 54% in April / May 2022. Mortgage approvals in July slowed, with the number of mortgages approved 5% below pre-pandemic levels (Bank of England).  

However, the Nationwide index, which uses data from mortgage applications at the approval stage and after the corresponding valuation (an early indicator), suggests prices are holding strong. In August 2022, annual house prices increased 10.0%, up 0.8% on last month. Transactions remained in line with pre-pandemic levels in August (HMRC). 

The main reasons behind some of the early indicators of the slowdown in the housing market are the increase in mortgage rates and consumer confidence due to cost of living pressures. 

Mortgage rates continued to increase in July 2022, with the average effective rate on new secured lending at 2.33%, higher than 2.15% last month and 1.83% last year (Bank of England). The Bank of England raised interest rates to 2.25% on 22nd September 2022. This will result in banks raising mortgage rates further.  

Consumer confidence is at an all-time low, according to the GFK consumer confidence index. The rising cost of living—while ameliorated through the National Insurance cut and energy cap-is still present. While consumer confidence will likely improve as a result of the package, for someone to make one of the biggest financial decisions they will ever make - purchasing a property. It seems unlikely that the savings will entice them while, mortgage rates are as high as they have been since 2016. 

Who will benefit from the stamp duty changes?  

First time buyers don’t pay stamp duty on the first £300,000. The change to this price cap – to £425,000 seems reasonable given that first time buyers house prices have risen 26% since this cap was put in place in 2017 (Nationwide). This will mainly benefit buyers in London and the South East, where first-time buyer prices are above the £300,000 threshold. Those first-time buyers will be able to spend more on a property without having to consider paying stamp duty. This may go a small way to helping first-time buyers in London, with the final applications for Help-to-Buy due on October 31st.  

First-time buyers will also face increased competition from existing homeowners, investors, and second homeowners, who will also benefit from the stamp duty savings (although only a £2,500 saving).  

Existing homeowners will benefit from the stamp duty cuts. However, with 83% of existing mortgage balances on fixed rates, which are likely to have been agreed on lower rates, if they were to move, they would be exposing themselves to much higher monthly mortgage payments. However, around 20% of fixed mortgages will expire in the next 12 months, and 17% are not fixed (Bank of England, FCA). These buyers may consider moving and therefore benefit from the stamp duty savings. It is, however, important to consider that buyers will end up paying higher monthly mortgage costs, as not only have mortgage rates risen, so have house prices.  

Investors / second homeowners are the wealthier buyer cohort and are likely to be mortgage free or on low LTVs, therefore less exposed to rising mortgage rates. A reduction in stamp duty rates and less competition from the other buyer types will create an attractive market. Increased activity in this market would likely put further pressure on renters.  

Rental market  

The long-standing imbalance between supply and demand in the rental market has continued to put upward pressure on rents. Rents are now 20% higher than pre-pandemic (February 2020 vs August 2022, HomeLet). Rising mortgage rates, Help-to-Buy ending, and a more competitive market for first-time buyers, is only going to make buying a first home harder.  

Although the size of the Build-to-Rent market is growing – in fact by 13% over the last year – there are still only 74,000 completed units in the UK (BPF). It will be a long time until the supply issues are solved in the rental market. With no mention of the rental market in the mini-budget, it will be up to landlords to decide how sustainable it is to increase rents with inflation.  

Summary  

The stamp duty changes are likely to support house prices—although much will depend on to what extent mortgage rate increases will offset this support. The changes are not going to help solve affordability issues; if anything, they are going to be made worse. A longer-term measure is needed to push housing market reform and increase supply in both the owned and rented markets, and not just stimulate an already overheated market.  

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