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OBR: stamp duty cut will drive house prices higher

The stamp duty exemption for first-time buyers will cause house prices to rise, according to the Office for Budget Responsibility (the budget watchdog).

OBR: stamp duty cut will drive house prices higher

The stamp duty exemption for first-time buyers could cause house prices to rise, which would wipe out any potential savings.

The Office for Budget Responsibility (OBR) has warned that the abolition of stamp duty for first-time buyers making home purchases worth £300,000, announced in the Autumn Budget, could result in only 3,500 extra home purchases.

It calculated the move would bump up house prices by around 0.3%, potentially wiping out savings for buyers. 

Chancellor Philip Hammond used his Budget to try and win over younger voters, providing them with a tax break worth up to £5,000. First-time buyers purchasing property up to £300,000 will pay no stamp duty and those living in more expensive areas will be able to claim the tax break on the first £300,000 on properties worth up to £500,000.

Paul Johnson, director of the Institute of Fiscal Studies (IFS), said the price rise could be bigger than the stamp duty cut because properties are transacted multiple times and, in part, because of the leverage effect.

‘If I pay £1 less in stamp duty, I can put down £1 more deposit, meaning I can obtain a larger mortgage,’ he said. ‘So the £1 cut allows me to spend more than £1 more on a house.’

However, he said first-time buyers wouldn’t automatically be worse off and instead of paying ‘£100,000 for £98,000 worth of house plus £2,000 tax, they might be paying £102,000 for £102,000 worth of house’. He describes this as a better outcome.

When the stamp duty cut is taken in conjunction with other measures the government has put in place to help young people to get onto the property ladder, first-time buyers could save up to 10% of the price of a property, according to AJ Bell.

Analysis shows that when the stamp duty cut is combined with the tax breaks offered by the lifetime ISA (LISA), this could equate to a huge saving.

Savers aged 18 to 39 can benefit from the LISA, which launched in 2016. It sees the government pay a 25% bonus of up to £1,000 for those saving £4,000 a year. Withdrawals from the LISA are tax-free if used to purchase a first home worth £450,000 or less, or taken after the age of 60.

Tom Selby, senior analyst at AJ Bell, pointed out that a first-time buyer purchasing a property worth £300,000 would have paid £5,000 in stamp duty, so they can benefit from that automatic saving following the Budget announcement.

He added that someone who saves £4,000 a year into the LISA for a decade could end up with a fund value of £66,000 when the bonus and investment growth is taken into account.

‘The combination of the £26,000 government bonus, investment growth via the LISA and the £5,000 stamp duty saving means the house would cost £274,000 - a 10% reduction,’ he said.

‘While the stamp duty relief is good news for first-time buyers, with a maximum saving of £5,000 and an average saving of £1,660, it’s hard to see it as a game-changer for most young people on its own.

'However, once you combine it with the tax-free investment returns and government bonus available via the LISA for first-time house purchases, the package starts to look more attractive,' he said.

In spite of the benefits, take-up of the LISA has been subdued. The OBR has reduced its forecasts for what the LISA will cost the government by 40% to £2.6 billion, as the savings wrapper has failed to gain traction.

‘This suggests a greater incentive may be needed to encourage more people to use LISAs and a higher bonus could be accommodated within the initial cost estimates,’ said Selby.

3 comments so far. Why not have your say?


Nov 24, 2017 at 17:22

An interesting heading rubbished by other contributors!

Currently people sell houses and leave you to sort your own stamp duty out unless it is near a flex price when financial engineering comes in. Vendors know what they want to receive and leave the rest alone.

And as for LISA - a waste of ink!

Economists are getting me down! How do they know what is produced when the taxman doesn't know! Who works out productivity?

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Law Man

Nov 24, 2017 at 18:30

One despairs at HMG's housing policy.

The objective should be to stop house prices rising; and lead to falls in real terms: a gradual approach avoiding harm to existing owners.

Instead HMG continues to facilitate price rises.

A better solution is ... build more houses (of the right type). Supply to meet demand, and jobs for the construction industry.

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Nov 29, 2017 at 11:22

The way see it is this:

(1) B2L Landlords do not get these subsidies

(2) Also I believe tax rule changes will mean that interest charged on their borrowings will no longer be tax deductible.

(3) Once you isolate London & Home Counties average affordable house prices are way below £300,000

(4) Local councils can place restrictions on planning applications to give priority to owner/occupiers.

(5) The practice of selling a leasehold and the freehold separately is to be curtailed/revised retrospectively.

(6) Measures involving trades people training and streamlining of planning applications should eventually lead to a increase in the rate of build.

(7) The return on capital employed for new builds is high comparatively speaking so there is no real need for house builders to increase prices even if the aftermarket suggests they should.

So all in all the future may not be orange but is certainly looks pretty good to me.

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