The current, fragile property market is like a house of cards: one gust of wind and it will all come tumbling down. Analysts are predicting that the current surge of sales that started up after restrictions were lifted cannot last. They have forecast that transactions and prices will fall as unemployment surges this autumn while the furlough scheme is wound up.
By creating this stamp duty holiday in autumn, it could take out the bottom of the market this summer, just as it is getting back on its feet. The silver lining, perhaps, is that this holiday will act as a safety valve against the worst of the falls when the terrible economic news starts piling up.
Mr Sunak is right to single out these buyers of homes under £500,000, many of whom will be first-time buyers, and most of whom will be hardest hit by the economic fallout of the pandemic. It is also this part of the market that is currently struggling, while the top end is racing.
Most first-time buyers have just had the rug pulled out from under them. Faced with lenders withdrawing low deposit mortgages from the market, the goalposts have been moved for first-time buyers’ deposits. Lender Nationwide, for example, has tripled the necessary minimum deposit for a mortgage, from 5pc to 15pc, as it worries house price falls could leave new buyers in negative equity.
First-time buyers already pay much less tax under recent changes: those buying property worth under £300,000 pay no stamp duty, while those under £500,000 pay it only on the amount above the allowance. Cutting stamp duty will just be a happy bonus for those first-time buyers who have the money for a big enough deposit to satisfy lenders, perhaps those who have access to the Bank of Mum and Dad.
But Mr Sunak’s move will do little to help those first-time buyers now trapped without any ability to get lending because their deposit pots are too small. More needs to be done to help this part of the market that acts as a foundation for the rest of it. Without those at the bottom of the chains, it can’t work higher up.
The lack of lending availability for first-time buyers will push them to use the Help to Buy programme, which requires only a 5pc deposit (with the Government providing an equity loan on top). There is even uncertainty around this, as it is due to end in 2023, and the Government has failed to either extend it or say what is coming next.
If anything, this stamp duty holiday could stimulate the part of the market that is already thriving. If the threshold is set at £500,000, and includes those properties worth over £1m that were hit with huge levels of tax in the 2014 reforms, there could be a huge boom of prime property sales. A side effect of the current weird lending market means that while banks are hesitant to deal with first-time buyers, they are throwing money at those who have high levels of equity. For those already in the market this stamp duty cut could mean savings of thousands; and for those buying multi-million-pound properties, hundreds of thousands.
It could also, perversely, act as a boost to landlords, who in theory could buy property and only pay the three percentage point surcharge, and not the total sum. It remains to be seen if the Government will give investors a helping hand.
It’s true that a stamp duty holiday could help sustain the market when it hits hard times this autumn. But there are better, cleverer ways to target stamp duty relief to the various parts that really need it. Faced with what many see as impending doom for the market, this could be an opportunity to completely overhaul the stamp duty system.
Why not treat stamp duty like a personal fund? You could pay tax only on the extra amount you pay for each new transaction. For example, if you moved from a £800,000 house to a £1m house, you would only pay stamp duty on the £200,000. This would boost transactions, making it cheaper and more appealing to trade up, stimulating the market.
It would also be an easy way to target the part of the market that needs boosting the most: you could give downsizers an incentive to move with a stamp duty rebate, in order to free up family homes. This could be done by giveing back tax refunds when selling a big family home and buying a smaller, cheaper property.
But one of the easiest, and quickest, reforms to the stamp duty system is this: stop adding unnecessary uncertainty into an already confounding system. If you want to reform it, do it quickly and without speculation. Don’t put buyers through the mill.