UK residential property market: the government needs to calm financial markets and homebuyers alike
New stamp duty savings to be eclipsed by higher mortgage rates.
3 minutes to read
A mini-Budget last month turned out to be a misnomer, with £45bn of tax cuts including a reform to stamp duty sending shockwaves through financial markets.
Stamp duty cut
The chancellor’s headline announcements included an energy price guarantee and tax cuts, but as part of the new administration’s pro-growth agenda there was also a change to property taxation.
The level at which stamp duty now becomes payable has doubled to £250,000 from £125,000, which will mean a saving of £2,500 for all buyers.
First-time buyers will now not pay any stamp duty on the first £425,000 (up from £300,000) and the value of any property on which they can claim this relief has risen to £625,000 from £500,000.
You can see the impact of the changes via our updated stamp duty calculator for England and Northern Ireland.
Wales has subsequently made changes to property taxation too although Scotland, which has its own system like Wales, has not.
Volatile financial markets
However, that is only half the story.
In simple terms, what the chancellor is giving away will be more than taken back by the Bank of England, which raised the bank rate to 2.25% from 1.75% last month as it acts to rein in inflation.
Following the mini-Budget and subsequent volatility in financial markets, the expectations for where borrowing costs will peak rose by 150 basis points.
See our analysis on mortgage affordability for more on the subject.
Based on the round of media interviews Prime Minister Liz Truss has given since, the government will not be swayed from pursuing its low-tax growth agenda.
However, hoping that financial markets simply see the light before the next general election feels unrealistic and time-honoured plans for efficiency savings won’t convince everyone. We expect further developments.
House prices to fall
The recent volatility is naturally causing buyers and sellers to hesitate. The only thing that moves quickly in the UK housing market is sentiment and it’s been damaged over the last seven days as mortgage products have been pulled.
Even if the government can start to reverse the impact of the mini-Budget, the reality of higher rates has dawned on people.
It therefore feels inevitable that prices will fall next year – Nationwide recorded flat growth month-on-month for September the first such reading since July 2021 – as rising rates keep downwards pressure on prices.
Debt cost increases as interest rates climb
This may alleviate in a years’ time. The Federal Reserve has raised the interest rate by 300bps so far in 2022 and has been joined by a host of others, including the European Central Bank (ECB), Switzerland’s National Bank and Sweden’s Riksbank implementing sizeable rises.
More is to come. Consensus is that with cooling economic growth, as long as inflation subsides, central banks may be forced to pause or reverse in the middle of 2023 – although central bankers after the annual gathering in Jackson Hole indicated that higher rates are here to stay.
It is clear economic headwinds, or storms, are gathering with few, but some, bright spots. The inflation and interest rates story clearly has further to run later this year and will likely dominate headlines in 2023 as well.
But should inflation lose steam and labour markets remain healthy, it will be bumpy ride but not a cliff-edge. Which forces will win out will only become clearer with hindsight.
Read more or get in contact: Tom Bill, head of UK residential research