The jury appears to be out on whether there will be respite from soaring house prices for first-time buyers once the stamp duty holiday finishes in its current format at the end of this month.
It is largely acknowledged that the tax break has been a major source of fuel for the massive rise in property prices in the past year because it has led to an explosion in demand. However, many other drivers are still in play, such as low interest rates, a perceived need for more space in the wake of multiple lockdowns, an ongoing lack of housing supply and greater availability of low-deposit mortgages.
Therefore some experts question whether July will bring a drop in prices, while others hold a different view.
First-time buyers (FTBs) will certainly be hoping for a price fall, given that the savings of up to £15,000 from paying no stamp duty on the first £500,000 of any primary property are often wiped out by rising prices.
In fact, Halifax says that from April 2020 to April 2021 almost £20,000 was added to the value of the average home.
Naturally, given their tighter budgets and lack of existing equity, FTBs are worst hit by rising prices. Yet some believe their gloom could dissipate when the current stamp duty holiday ends.
Homebuying firm Yes Homebuyers’ founder, Matthew Cooper, says: “It’s clear sellers are attempting to cash in on the stamp duty holiday by reaching new highs of unrealistic asking prices. In doing so they’re crushing the hopes of many would-be FTBs who find themselves priced out.
“Those hard-pressed to reach the first rung of the housing ladder may have the last laugh, though, as an already weary market continues to overheat. When the end of the stamp duty holiday comes and it causes buyer demand to evaporate, we’re likely to see property values fall at pace.”
Asking prices
While asking prices are often scoffed at as an indicator of true house prices, they can influence demand. The May Rightmove index revealed a new record average asking price of £333,564, up 1.8% since April.
Hargreaves Lansdown analyst Sarah Coles says: “The property boom has settled in for a few months, but its longevity can’t be taken for granted. Prices rose so fast in the first place because demand was funnelled into a short period.
“The closure of the market last spring, and then the artificial deadline of the stamp duty holiday in March, meant people were in a hurry to buy and prices rose. The extension of the deadline encouraged more buyers than sellers, and at the moment this imbalance is driving price rises. The new stamp duty deadline in June could rebalance the market and cool it significantly.”
As Coles points out, the tax break on the first £500,000 of a home’s value was originally due to finish at the end of March, but chancellor Rishi Sunak announced in the Budget of the same month that it would be extended to the end of June.
After that, it will revert to the normal exemption for FTBs on the first £300,000 of the price of most homes. Where the home costs more than £500,000, for FTBs and all others the stamp duty holiday will taper off from July so that the tax is not charged on the first £250,000 of the price, before the standard £125,000 threshold returns from October.
The Covid effect
Some experts think FTBs may continue to struggle after 30 June because many other factors, which have contributed to higher prices, will still be prevalent.
Coreco managing director Andrew Montlake explains: “Although the stamp duty holiday is starting to tail off as a driver of transactions, people now want something different from their properties, namely space and a home office. Everything has changed due to the pandemic and that change will play out over several years.
“The demand for a new type of home, coupled with the government’s Mortgage Guarantee Scheme, will continue to support transaction levels in the months ahead, and potentially in the medium term as it will ripple through the market and maintain a certain level of transactions.
“There may be a minor correction in price growth later this year but the lack of supply, and cheap money, mean house prices are unlikely to fall materially.”
Nationwide chief economist Robert Gardner has a similar view on the next few months but he thinks the situation may change dramatically before the turn of 2022.
He says: “Housing market activity is likely to remain fairly buoyant over the next few months as a result of additional support for the labour market included in the Budget, continued low borrowing costs, and with many people still motivated to move as a result of changing housing preferences in the wake of the pandemic.
“With the stock of homes relatively constrained, there is scope for annual house-price growth to accelerate more in the coming months.
“Further ahead, the outlook for the market is far more uncertain. If unemployment rises sharply towards the end of the year, as most analysts expect, there is scope for activity to slow, perhaps sharply too.”
Halifax managing director Russell Galley has a similar view to Gardner’s.
“The influence of the stamp duty holiday will fade gradually over the coming months as it’s tapered out. But low stock levels, low interest rates and continued demand are likely to keep underpinning prices.
“Savings built up over the months in lockdown have given some buyers even more cash to invest in their dream properties, while the new Mortgage Guarantee Scheme may have eased deposit constraints for some prospective homebuyers.
“Yet we remain cautious about the medium-term prospects of the market. The current level of uncertainty and the potential for higher unemployment as furlough support ends lead us to believe that house-price growth will slow towards the end of the year.
Of course, anyone attempting their first step on the ladder will hope for a slowdown — or even a reversal — of price rises long before the end of the year. Yet the irony will not be lost on many that a policy some saw as potentially helping FTBs when it was first established last July may in fact have damaged their pockets.
Nevertheless, a lot of FTBs have been tempted by the prospect of not paying any stamp duty.
Trussle head of mortgages Miles Robinson said in March, shortly after the extension was announced: “We’ve seen applications from FTBs increase by 106% year on year. Enquiries from next-time buyers, who have the most to gain from the tax break, have increased by 120%.”
Whether those who began their mortgage search in March will reach completion by the end of June is unclear. The extra demand — alongside the problems many firms experienced with staff working from home — has created a significant backlog across the homebuying process. Back in March, Robinson said it could take some buyers six months to complete a transaction.
Lockdown savings
Another factor with the potential to support house prices over the coming months is the huge amount of extra savings many have built up during the pandemic, having been unable to spend as normal. The Bank of England estimates about £180bn of additional savings have been accumulated by the public since the start of the crisis.
Research by the Building Societies Association in March found that, among those lucky enough to have gathered extra savings, 12 per cent wanted to spend their extra cash on buying a home. However, FTBs are less likely than existing homeowners to have built up excess savings.
Gardner says: “The increase in savings has been concentrated among older, wealthier households. The fact that about a third of FTBs in England in 2018/19 said that friends or family had helped them to raise a deposit through a loan or gift suggests the recent surge in savings will help some, but the impact won’t be spread evenly.”
Whether the savings boom will end up supporting property prices is unclear, but what is certain is the cold, hard numbers that show the recent dramatic rise in prices.
At the time of writing, Halifax’s latest house-price index showed that the average value in April had beaten the record high set the month before by 1.4%, and was up 8.2% annually, to £258,204. This may be bad news for recent homebuyers.
“The concern is that people who have rushed to buy a property to make the most of stamp duty savings could regret it if the market starts to cool,” says Montlake.
To put the new average price of £258,204 into perspective, it is about eight or nine times the average UK annual wage, depending on which salary study you believe. And potential FTBs are likely to be closer to the lower end of the salary scale.
Garrington Property Finders CEO Jonathan Hopper says: “The boom is the product of a perfect storm of factors. Years of demand that had been repressed by Brexit uncertainty were unleashed just as the difficulties of lockdown living forced thousands of people to fundamentally reassess what they wanted from their home.”
Whatever the overall effect on house prices, the impact of the stamp duty holiday on property demand had begun to fall away several months ago; by April, transaction levels were starting to decline. In fact, given it can take many months to buy a home, it is likely that buyer demand was tailing off long before the original March deadline, albeit some argue the extension in March gave more impetus to demand.
Government data shows that residential transaction levels had been building every month since the market reopened last May, including big jumps in February and March this year. However, in April there were 35.7% fewer transactions than in March, with the number falling from a whopping 183,170 to 117,860.
Nevertheless, the April figure matched the strong data for last November (115,190), making for a lively spring.
Extended holiday
Gardner believes the stamp duty holiday extension prompted a reacceleration of demand in spring, although it is not known how that affected transactions given the huge lag between beginning a property search and completion.
Hopper says: “The stamp duty holiday fanned the flames, spurring thousands of would-be buyers into action.
“Spring is traditionally a busy time for the property industry, but this year has been off the chart. In many areas, stiff competition for the best homes has driven up prices so fast that the average buyer would invariably end up paying a price premium well in excess of any tax saving provided by the stamp duty cut.”
Few would dare to predict the direction of the housing market for the rest of the year and into 2022 — things can change so quickly during this pandemic. But FTBs will hope that the end of the stamp duty holiday, while removing much-needed tax savings, also reverses the soaring growth in prices.
