Published on 4 Dec 2014 Sections

Will stamp duty cuts leave you locked out of housing market?

It was the chancellor’s big autumn giveaway. Now many warn that cuts to stamp duty could have the opposite effect: increasing house prices and leaving more people frozen out of home ownership.

It was billed as the chancellor’s big autumn giveaway – the headline-grabbing tax reform that could save £4,500 on an average home and benefit 98 per cent of homebuyers.

But changes to stamp duty, announced on Wednesday in George Osborne’s autumn statement, has come under under fire from campaigners.

Under the old regulations, the so-called “slab tax” sees the amount owed jumps at sharp price levels. Now it has been replaced by a graduated rate, working in a similar way to income tax. So homes of up to £125k will pay 0 per cent; 2 per cent up on homes up to £250k; five per cent up to £925k and 10 per cent on homes up to £1.5m.

Yet some say rather than making homes more affordable, it will have the reverse effect: lining the pockets of sellers and agents while fuelling further and faster house price rises.

Here is how: the drop in tax means all buyers essentially have more money to spend.

So higher collective spending power pushes up the prices of housing across the board. Without more homes being built, demand exceeds supply, competition increases and prices continue to rise.

Eventually the price of a house exceeds the cut in stamp duty and creates a new distribution of money in which the seller and agent – rather than the state – reaps in the benefit. The cycle continues – eventually heating the housing market – and, at worse, precipitates a crash.

‘A future challenge’

It is a bleak scenario. And, thankfully for George Osborne, unlikely to create any issue in the next six months.

But should it happen after that, many believe the housing market is not geared up to protect itself. “We need to warn people currently in the buying process that because of the way our housing system works, the money they save doesn’t necessarily mean more to spend on Christmas presents,” Paula Higgins, chief executive of the HomeOwners Alliance told Channel 4 News.

“Because the home buying process is open to manipulation, buyers could be subject to house price hikes at the eleventh hour as sellers see an opportunity to maximise their return on investment.”

Angus Hanton, the co-founder of the Intergenerational Foundation Group warns that the reforms “prop up an already unaffordable London housing market”. In turn it will attract “more buy-to-let landlords and older people with access to their pension pots” – the type clientele that do little but add to the housing price rise.

Which brings us back to the core problem of housing in Britain: a supply shortage and lack of affordable homes.

Without the construction of new homes to ease levels of demand, many believe it could soon be back to square one. For this reform will only serve a small percentage of the UK housing market, and doesn’t take into account the increasing number of potential first time buyers who are still unable to get onto the property ladder.

Danny Dorling, professor of Geography at Oxford University and author of All That Is Solid, told Channel 4 News: “We are now back to pre-World War II levels of renting with more people facing the prospect of renting for their entire life.”

“This is the politics at the heart of the stamp duty cut. It is designed to trigger a housing boom before the election. The Tories know that they cannot not win seats outside of London unless the value of homes is rising. This is critical to their election prospects next year.”

Are you a potential homebuyer sold on the new stamp duty cuts? Tell us #C4News

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