The reform the mortgage market has long been calling for has finally arrived. The shock overhaul of the stamp duty system, announced in the Autumn Statement last week, has heralded claims that Chancellor George Osborne has played another political masterstroke, just nine months since the Budget bombshell on pensions flexibility.
Osborne claimed the reforms will singlehandly cut the tax bill of 98 per cent of homebuyers who pay it.
But with talk of the move stoking house prices without the accompanying boost in supply, how will the housing market be changed by the reforms over the coming months, and in the longer term?
And with an election looming, how will voters in all camps, be it first-time buyer, second steppers and those at the top end of the market, react to the historical stamp duty system being changed in such a radical way?
Smoothing the market
The modern stamp duty land tax was introduced through the Finance Act 2003, and since its implementation has caused property sales to ‘bunch up’ at critical points around the tax thresholds.
Previous attempts to tackle the structural issues around stamp duty involved raising the thresholds for each tax band though these have historically been outpaced by rapid house price inflation. Fiscal drag, bringing homeowners up into higher tax bands as a result of price increases, helped stamp duty revenues almost double from £3.59bn in 2003 to £6.5bn just five years later.
As of last week, there will be no tax on the first £125,000 paid; 2 per cent on the portion up to £250,000; 5 per cent on the portion up to £925,000; 10 per cent up to £1.5m; then 12 per cent on everything over £1.5m.
Association of Mortgage Intermediaries chief executive Robert Sinclair says: “Clearly it is a step in the right direction and the industry has asked for this for a very long time. It will take away the inequities that often emerge in pricing around the margins so from both an industry and consumer perspective, it is a very positive step.”
London Central Portfolio chief executive Naomi Heaton says: “The new regime will smooth out the price inequities that we’ve seen historically as a result of the slab structure. A hugely disproportionate number of properties were being sold – and potentially undersold – just below the £250,000 threshold compared with just above that price mark.”
Estate agents Zoopla found that 28,635 properties sold in the year to May were under-priced to make them more appealing to buyers by avoiding steep jumps in stamp duty.
Buying agents Property Vision senior partner Peter Mackie says: “The impact of the changes will be greater at the lower end of the market where buyers rely on borrowed money, rather than the higher end where, if a buyer can afford to pay cash for a £50m house, they can afford the stamp duty.”
John Charcol senior technical manager Ray Boulger believes activity levels are set to rise as a result of the new stamp duty system, with the wider effects benefitting the whole economy.
He says: “The reforms will stimulate activity levels which have pared back a bit in the past few months, without springing back in the autumn the way they normally do. This will mean people with properties above a certain price mark can now start marketing them at the right price without having to short-change themselves because of an archaic tax system.
“It will unleash activity that was previously constrained and that will apply in London as much as it will elsewhere. Purchase transactions will certainly be pushed upward and the chain effect may even help stem the remortgage slump; the impact will be nationwide. Transactions will increase and that leads to increased consumption in the wider economy as well as growing tax revenues.”
Heaton agrees housing market activity will rise, and says this will lead to an increase in house prices.
“With a smoothing market, we will see increased activity in the middle of the market where buyers are saving up to £5,000 in stamp duty. Ironically, these savings will be eradicated by the resultant price inflation that will follow the increased demand.”
But GPS Economics managing director Gary Styles argues the net gain in house prices and transactions will be minimal.
He says: “Of course the changes are welcomed, but in all honesty, the Office for Budget Responsibility forecasts for house prices and transactions have actually been downgraded since the Budget forecasts, with house price inflation expected to be 0.4 per cent lower than at Budget time and transactions around 114,000 lower.
“These revised forecasts allow for the changes made in the Autumn Statement and do not imply much of a net impact from the stamp duty changes.”
From the broker perspective, Your Mortgage Decisions director Dominik Lipnicki says clients have already begun to react. He says: “We have certainly seen people buoyed by the news. The vast majority of brokers have been calling for a long, long time for this change and it is really pleasing to see the positive impact it will have for thousands of buyers. It should stimulate sales at more normal prices and that helps people move into better homes, and sellers can start to achieve the right prices.”
Who really benefits?
Building Societies Association head of mortgage policy Paul Broadhead says first-time buyers are likely to benefit from the changes, as the combined obstacles of deposit and stamp duty are now not so high.
He says: “First-time buyers have had a huge barrier removed. They would previously have had to save up for their deposit and the hit from stamp duty – under the new regime those buyers can now simply focus on getting their deposit together and getting on the ladder sooner than they ever could before.”
This view is shared by many but interestingly is unsupported by data from HM Revenue & Customs. The figures show a reduction of just £400 in the stamp duty payable on a house valued at £210,000, the average price paid by first-time buyers according to the Office for National Statistics.
The same HMRC calculations show buyers purchasing their second home are set to save as much as £4,500 – the saving made when buying a house for £275,000.
Estate agent Waterfords managing director Brendan Cox says these second steppers will therefore be the biggest gainers.
He says: “The change will make for an interesting market in 2015. Without the crippling burden of the previous stamp duty rate, many first-time buyers and even more second steppers who have been saving may suddenly be in a position to raise the deposit required to obtain mortgage finance.”
What next for house prices?
Capital Economics property economist Matthew Pointon argues house prices in London will be pushed up under the new regime, as sellers seek to exploit the savings made by buyers.
“If you assume the cuts were going to be factored into house prices – you would be looking at around a 1 per cent increase for homes up to around £1m. Beyond that, I think we’ll see an increase of up to 3 per cent.
“If vendors know buyers are no longer facing the heavy stamp duty burden, they will naturally want to exploit that by increasing their selling price. If anything this will add to the steam in London.”
But Savills UK head of research Lucian Cook says the higher end of the property market is already subdued, and he expects this to last for at least the next six months.
“We’ve already seen the successive increases in stamp duty suppress price growth in prime central London so now with this additional charge, I imagine the top end of the market will remain subdued until the election at least.”
London house prices jumped almost 20 per cent in the year to September, according to Nationwide, but the rest of the UK has not experienced the same boom.
Heaton believes the reforms could spark gains for homeowners outside the capital.
“If properties around the £250,000 mark are set to generate the biggest savings in stamp duty, and that is a price much closer to the national average, that is where activity will be expected to be busiest – which is likely to then result in price gains.
“We’re looking at a reform that makes it far more tempting to buy a house in the middle of the market, which suggests it is not London that benefits but homeowners across the country.”
Politics at play
Shadow chancellor Ed Balls has said he will still push ahead with his planned mansion tax – an annual levy on houses priced between £2m and £3m that has been widely criticised by industry commentators.
Centre for Policy Studies head of economic research Adam Memon argues although the reforms will generate a net gain in stamp duty revenue, they may not amount to the surefire political win some have suggested.
Memon says: “The Conservatives have certainly taken out one of Labour’s overriding lines that taxation on property is too low, so the fact this move will generate more revenues while cutting taxes for most, certainly does make Labour’s argument look less convincing.
“However, I don’t think this will be any kind of deciding factor in dictating how people will vote. By the same token, the people the Conservatives are aiming for are middle-income voters, so while some argue they will alienate their base voters, the majority of their target audience will benefit from this.”
But Cicero Group director and chief corporate counsel Iain Anderson believes any increase in house prices stemming from the reforms could actually see a sharp turn in public opinion.
He says: “While this move is likely to boost demand in the run up to the general election in May – watch out for any upward effect on prices. An Osborne house price boom seems unlikely to go down well with most voters.”
The changes to stamp duty may well turn out to be one of the most widely welcomed political moves in decades. Yet if a surge in house prices ends up hurting people who aspire to move up the ladder, the response could end up very different.
Sinclair says: “This is more a correction of an inequitable tax as opposed to being targeted to help any one particular group. It’s hugely overdue but in truth, we have just gotten to where we should have been for a long time.”
ADVISER VIEW: Jonathan Clark
“Nobody liked the idea of this mansion tax and now, after Osborne has announced a tax-reform that benefits such a vast proportion of the population, I don’t see what Labour can do to trump this. They had 13 years in power and did nothing about stamp duty – even if this is just a last throw of the political dice from the Conservatives before the election, Osborne has landed a double-six.”
Jonathan Clark is mortgage partner at Chadney Bulgin
EXPERT VIEW: Iain Anderson
So 98 per cent of homebuyers will pay lower tax – sounds like a pre-election headline made in heaven.
The revamping of stamp duty in last week’s Autumn Statement was the final major act from the Conservative side of the coalition intended to show George Osborne “on the side” of homeowners – and prospective ones.
While the chatterati opine on a potential return to an Orwellian ‘Road to Wigan Pier’ 1930s Britain, the Chancellor will have been happier with the tabloid reaction welcoming this Middle Britain move with open arms.
Public reaction to the announcement is entirely positive: a recent YouGov poll found 74 per cent of people think the changes to stamp duty are a good idea, 7 per cent a bad idea.
However, the Conservatives should be wary as ‘bad idea’ would rocket to 58 per cent if the policy change leads to increased house prices.
So while this move is likely to boost demand in the run-up to the general election in May – watch out for any upward effect on prices. An Osborne house price boom seems unlikely to go down well with most voters.
But perhaps the Chancellor’s gamble is that prices will not budge much before the late spring. Since the Chancellor spoke, there has not been a Conservative bounce in the polls as there was in the days following Cameron’s conference speech in October.
With Autumn Statement coverage now focusing on deficit figures, voters are pessimistic about their prospects regardless of who’s in power after next May. Current polling shows the Tories only have a slight advantage on Labour, but the coalition is still taking far more blame than Labour for the non-improvement of living standards.
With voters being so concerned with the wider prospects for both themselves and the country, it now feels unlikely that one policy will have any real positive impact in six months time.
Iain Anderson is director and chief corporate counsel, Cicero Group