Duty cuts will hurt first-time buyers and fuel an inflationary housing bubble as house prices rise at their fastest rate in nearly 20 years, the government has warned.
In the latest report detailing the tax cuts favored by Prime Minister Liz Truss, the Times says Kwasi Kwarteng, the chancellor, is set to launch radical cuts to stamp duty as a “rabbit in the hat” measure in his mini-budget in the House of Commons on Friday.
But economists and real estate experts say measures to further stimulate an already red-hot housing market would mostly benefit wealthier individuals and risk pushing up prices for first-time buyers.
It comes less than a year after ex-chancellor Rishi Sunak’s tariff cuts expired during the Covid pandemic, which analysts say mainly benefited London and the south-east and had little impact elsewhere across the UK.
“It’s bullish short-termism at its worst,” said Lewis Shaw, founder of Mansfield-based Shaw Financial Services. “This move will further increase house prices, worsen inflation and further drive out first-time home buyers.
“If someone asked me how to push an already overheated housing market into dangerous bubble territory and make things worse for everyone, this policy would be it.”
Stamp duty is paid by buyers of land or property in England and Northern Ireland, with higher rates above certain thresholds. In Scotland and Wales, special land taxes apply.
Reports of a potential cut sent shares in British builders higher on the London Stock Exchange on Wednesday morning, with gains of between 3% and 6% for FTSE 100 companies Barratt, Persimmon, Taylor Wimpey and Berkeley – among the market’s best performers. blue-chip index.
UK average house prices increased by 15.5% in the year to July, the highest annual inflation rate since May 2003, according to official data.
Many economists consider the state tax “bad tax” because it discourages mobility, because it is paid for by home buyers, not sellers. Several experts have called for fundamental changes in the way property is taxed, including changes in the municipal taxation system.
The cut in duty could help offset a potential slowdown in the housing market as the Bank of England raises interest rates and the cost of borrowing is expected to hit 4.5% next year, increasing financial pressure on property buyers.
But analysts warned that without wider reforms, as well as efforts to increase housing supply, the measure would add to inflation and do little to help those struggling to get on the housing ladder.
“As borrowing becomes more expensive, the market already looked like it was going to shift toward wealthier, higher-income borrowers and away from first-time buyers,” said Neal Hudson, a real estate analyst. “Changes to stamp duty could accelerate this by further reducing the cost of buying for investors [and] second home buyers.”
The duty cuts would also come at a heavy price, at a time when the government is preparing to launch billions of pounds in business profit tax cuts, national insurance and a freeze on energy prices. Across the UK, property tax generates more than £15 billion a year for the Exchequer.
Truss has argued that getting the economy moving is her primary focus, above the immediate impact of her policy measures for rich or poor.
Measures to stimulate the housing market could stimulate wider economic activity by boosting demand for related goods and services such as estate agents, solicitors, removals, building trades, furniture and white goods.
However, experts say launching the new tax break soon after Sunak’s customs holiday would limit its impact. In addition to the rush to move for more space that occurred during the Covid pandemic, the customs holiday spurred a 43% increase in property transactions last year.
A report by the Organization for Economic Co-operation and Development this summer found that property taxes in the UK are outdated and favor the wealthy elite. Efforts to boost economic growth by cutting property transaction levies are fueling high prices, it warned.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “The only reason these holidays work is because people feel they have a small window of opportunity to take advantage of, otherwise they will miss out. The point where they think they can just wait for the next one, they will start to become less effective.
“Even if it stimulates demand, it ignores the fact that the real drag on the property market is a severe lack of supply.”