Property prices ease in October
Nationwide (https://www.nationwide.co.uk/) have said this week that the price of a typical UK home increased by 2.4% year on year in October. This represented a modest slowdown from the 3.2% pace recorded the previous month. House prices rose by 0.1% month on month in October, after taking into account seasonal effects.
Housing market activity has remained relatively resilient in recent months, with the number of mortgage approvals approaching the levels seen pre-pandemic, despite the significantly higher interest rate environment.
Solid labour market conditions, with low levels of unemployment and strong income gains, even after taking account of inflation, have helped underpin a steady rise in activity and house prices since the start of the year.
Providing the economy continues to recover steadily, as we expect, housing market activity is likely to continue to strengthen gradually as affordability constraints ease through a combination of modestly lower interest rates and earnings outpacing house price growth.
What will the expiry of the stamp duty holiday have on activity levels?
The temporary increase in the nil rate stamp duty thresholds will expire on 31 March 2025 and revert back to their previous levels.
“From that point, for first-time buyers purchasing a property of under £500,000, the nil rate band threshold will fall to £300,000 from £425,000. For other residential buyers, the nil rate band threshold will decline to £125,000, from £250,000.
The main impact of the stamp duty changes is likely to be on the timing of property transactions. This is because purchasers aim to ensure their house purchases complete before the tax change takes effect. This will lead to a jump in transactions in the first three months of 2025 (especially March). This will probably lead to a period of weakness in the following three to six months. This has occurred in the wake of previous stamp duty changes.
However, the swings in activity are likely to be somewhat less pronounced, in this instance. This is because the stamp duty reduction has been in place for some time. Add to this that its planned expiry was well known, therefore it should be less pronounced. Affordability is also still relatively stretched at present. This is a result of the higher interest rate environment, which is acting to dampen housing market. Nevertheless, determining the underlying strength of the market will become more challenging until this period of volatility passes.
How many first time buyers will this affect?
Data suggests that the stamp duty change will affect around one in five first-time buyers. However, the impact will vary significantly across the country. This is largely as a result of the difference in house prices across the UK.
The largest effects are likely to be in the East & South East of England, where 40% of first-time buyers paid between £300,000 and £425,000 for their homes, where the change will increase cost of moving for the affected first-time buyers by £2,900 on average. The areas least affected are Yorkshire & The Humber, the North of England and Northern Ireland, where less than 10% of first-time buyers paid between £325k and £425k for their homes. Moreover, as the chart shows, the additional tax paid by affected first-time buyers in these regions will, on average, be lower than in London and the South East.
What about the 2% rise in Stamp Duty for second homes & buy to let properties?
The Chancellor also announced an increase in the higher rate of stamp duty for additional dwellings by 2 percentage points to 5%, which took effect on 31 October. Based on data for the year to June 2024, this would affect around 194,000 transactions, around one in five residential transactions in England & Northern Ireland. We estimate that a typical buy-to-let purchase would add approximately £4,000 to stamp duty costs. Consequently, this may dampen demand in this part of the housing market.
Geoff Flewers, Sales & Marketing Director of Jukes Estates Harlow said: “We expect this year’s house price recovery to come under pressure following the increase in borrowing costs triggered by the Budget. How much depends on the reaction of bond markets in the coming days and the Bank of England’s rate decision and comments next week. It appears a ‘ Liz Truss mini-Budget’ moment has so far been avoided.”