It’s been a week of mixed news for the housing market. On Thursday 22nd September the Bank of England raised the base rate by a further 0.5 basis points to 2.25% - the highest level in 14 years. While a day later, Government announced a package of measures to help put money back in people’s pockets and boost economic growth.
The previously announced energy cap freeze alongside the rebate should give £1,400 back to the average household, compared to if prices hadn’t been capped - although of course future energy bills will still be higher than we’ve been used to. Meanwhile, the reversal in the national insurance hike, from 6th November, coupled with income tax cuts planned from April 2023, will also help take the pressure off household finances.
Here we look at the specific policies related to the housing market and explain what they mean for buyers, sellers and tenants.
Interest rates rise to 2.25%
Interest rate increases remain the biggest threat to the housing market over the next few months. While the 54% of households who own properties outright remain largely unaffected, many of the 7.2m households with a mortgage are likely to feel the impact at some point. This latter group, make up around 70% of buyers today.
The average mover purchasing a £500k home with a 40% deposit could see their monthly mortgage payment rise to £1,585, up from £1,144 had they purchased this time last year when interest rates were lower.
First-time buyers and younger movers are likely to be hardest hit, however. This is because they’ll now spend a much higher share of their mortgage payment servicing interest, rather than paying off the loan. This will reduce their ability to accrue equity in their homes in the medium-term.
As we set out in our forecasts, if average mortgage rates begin to reach the 5% mark, it heightens the chances of house price falls. We’re not at that point yet and yesterday’s rate rise is likely to mean mortgage rates will hover around 4%.
Stamp duty
Today, the Government announced a permanent stamp duty (SDLT) cut, effective from now. The nil-rate band at which movers start paying stamp duty has increased from £125k to £250k. This will create a maximum saving of £2,500 for buyers. Although, more importantly, it will mean that 47% of movers will no longer pay SDLT, compared to just 12% when the nil-rate band was £125k. A mover purchasing a £500k home will see their stamp duty bill fall from £15,000 to £12,500.
First-time buyer stamp duty
The government have also increased the threshold at which first-time buyers pay stamp duty, to ensure that they retain an advantage. From today, first-time buyers will no longer have to pay stamp duty on homes up to £425k (previously £300k). This tax reduction will be available to all first-time buyers purchasing homes up to £625k, although they’ll still pay normal rates of stamp duty (5%) on the portion between £425k and £625k.
A first-time buyer purchasing a £600k home will see their stamp duty bill fall from £20,000 to £8,750 – a 56% saving.
This is good news for first-time buyers, particularly those in London and the South where properties are more expensive as they often hit the stamp duty threshold. It means that the average first-time buyer in England will see their bill fall from £4,517 to £3,201. 87% of first-time buyers in England will no longer pay stamp duty, compared to 69% so far this year.
In London, this means that 45% of first-time buyers will be stamp duty free and the average bill should fall from £17,990 to £13,500.
What’s the overall impact on the housing market?
The array of tax saving measures announced today are good news for households because it will put a little bit more money back in their pockets. But for those with a mortgage, rising interest rates remain the biggest threat to house price growth in the months and years ahead, and are likely to significantly outweigh any stamp duty savings.
First-time buyers, who are being hardest hit by rising rates, have been given an additional boost through stamp duty savings. This will particularly help more affluent first-time buyers who are purchasing more expensive properties (up to £625k). But inflationary pressures, limiting the amount they can put aside each month, combined with rising interest rates will still dampen how much first-time buyers can afford to pay for a home.
Overall, this week’s announcements don’t really alter our view of where the market could head. There might be a little bit more upside for house price growth due to the stamp duty cuts and other tax saving measures, but equally, recent economic data suggests that there’s a stronger chance that interest rates rise beyond our expectations, which would weigh on growth.
On balance, it still seems likely that house price growth across the country will slow in the coming months, reaching 0% by the end of 2023. Transactions will also slow, but the stamp duty cuts could provide a bit of upside here.
What about the lettings market?
There has been less news about the lettings market this week. Rising rates will continue to eat into the profit landlords can make if they are coming to the end of a fixed-term mortgage. But scrapping the planned corporation tax hike is good news for company landlords who are seeing mortgage rates touch 6% now. It’s investors who own buy-to-lets in their personal name who will really feel the squeeze.
However, landlords looking to purchase a buy-to-let will also benefit from the new stamp duty cut, reducing their stamp duty bill from £9,900 to £8,780 on average. Three quarters of investors purchase buy-to-lets under the £250k mark. This tax cut might encourage a few more landlords into the market in the short-term, but again, rising rates are likely to offset any savings.
For tenants, the package of tax cuts should limit the squeeze on their incomes a little, but affordability will remain an issue and keep a loose lid on future rental growth.
