Why cutting stamp duties won’t prevent a catastrophic fall in house prices

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Andrew Wishart of analyst firm Capital Economics said: “The market’s reaction to the announcement suggests that mortgage rates above 6% are now a distinct possibility, which would leave house prices more overvalued than in 2007”.

Saving on stamp duty will help increase buyers’ deposits because they have to be paid up front, Wishart says. “But it will be far from enough to offset the hit to demand from further mortgage rate hikes. While the consensus is that house prices remain stable, we are increasingly convinced that a significant correction is ahead.

In August, new buyer inquiries fell at the fastest rate since April 2020, according to the Royal Institution of Chartered Surveyors, a trade body. Excluding the Covid housing market shutdown, this is the biggest drop since the global financial crisis.

In September, GfK’s consumer confidence index hit -49 – the lowest mark on record since the measurement began in 1974.

Forecast of a global real estate slowdown

Forecasts of lower house prices come amid broader expectations of a slowdown in the global housing market as central banks scramble to tackle soaring inflation.

Earlier this week, Jerome Powell, chairman of the US Federal Reserve, warned that the boom in the US housing market would reverse, with the central bank raising interest rates by another 0.75 percentage points.

Mortgage rates in the United States have already exceeded 6 pc. Prices have yet to fall, but sales have fallen for seven consecutive months. Capital Economics forecast a price drop of 5%.

Pandemic-era hot real estate markets are now feeling the slump across the globe. House prices in New Zealand fell 11% between their peak in November and July, according to the Real Estate Institute of New Zealand. Capital Economics forecast a 20% drop in Canada, a 15% drop in Australia and a 10% to 15% drop in Sweden, to name a few.

Should the tax cuts have gone further?

The Kwarteng decision has brought the zero-rate brackets roughly in line with house price growth since they were last changed (the £125,000 zero-rate was set in 2006 and the zero-rate for the first-time buyer was introduced in 2017).

But the Chancellor did not adjust the top brackets accordingly. Instead, the lowest stamp duty band was removed. This means that the lowest rate is now 5pc, whereas previously it was 2pc.

Many are disappointed with the tax cuts. Matt Henderson, of Strutt & Parker estate agents, calls for a much bigger overhaul.

“A complete overhaul of the system is needed to further reduce barriers to market entry for first-time buyers and create liquidity around downsizers releasing underutilized inventory into the market.”

Richard Donnell, of real estate website Zoopla, says: “If we are to meaningfully mobilize the housing market, bigger changes are needed to offset the impact of rising mortgage rates.

Kwarteng should have gone much further, says Hudson.

“We’re quickly moving past a point where £2,500 or even £5,000 makes a big difference,” says Hudson.

“Stamp duty is a dumb tax, but these changes are slightly disappointing. Many people expected something much bigger. The government estimates that these changes will encourage an additional 29,000 people to move. It’s almost nothing.

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