House prices fall as tax break ends
Despite a fall in prices and end of stamp duty tax cuts experts predict market will hold firm. By
HOUSE prices suffered the biggest fall in more than a year in July as customers shunned the market after the stamp duty holiday was wound down.
Average prices slipped to £244,229 according to an index compiled by Nationwide, down 0.5pc from the previous month, in a sign that the red-hot property market is starting to cool after hitting record highs.
This was the sharpest drop since June 2020 when the first lockdown pulled down prices. Annual growth eased from a 17-year high of 13.4pc in June, but stayed at 10.5pc.
The stamp duty holiday has protected the property market from the full brunt of the pandemic, fuelling a surge in prices despite the biggest recession in 300 years. Nationwide said that a rush to find more green space has also propped up activity, with many homeowners fleeing cities.
The starting threshold for stamp duty payments was cut from £500,000 to £250,000 in July, slashing thousands off the savings made on many house sales. This threshold will revert to the pre-covid level of £125,000 in September.
Britain’s frenzied housing market, which defied the worst economic slump in 300 years, is finally showing some signs of cooling. According to Nationwide, the average value of a home fell 0.5pc to £244,229 in July, the first decline in four months.
That compares to February 2020, before Covid, when the average price of a home was just over £216,000. By June 2021, the market hit more than £245,400, the strongest rise for
17 years
So is this it? Is the boom turning to bust? Economists say the loss of momentum in the market is largely down to the stamp duty tax break in England, with the maximum saving on the tax having been reduced from £15,000 to £2,500.
But Martin Beck, senior economic adviser to the EY Item Club, notes that it is not only taxes which threaten the market.
“On measures such as the ratio of house prices to household incomes, affordability looks increasingly stretched. And despite a recovering economy, higher inflation and the prospect of some increase in unemployment when the furlough scheme ends means the outlook for household income growth is not all positive,” he says.
The average first-time buyer takes on a mortgage totalling more than 3.5-times their income, while movers borrow 3.4-times, according to data from UK Finance.
They also need bigger deposits. Nationwide figures indicate the average first-time buyer needed a deposit worth 55pc of their annual incomes in the second quarter of this year, a record high and a barrier to home ownership.
Yet Beck also notes that there are several reasons to think the market could hold firm: ultra-low interest rates, household savings and a long-term shift in the way people work and commute.
Banks raised rates in the frenzy of late 2020 and early 2021, as surging demand meant they had more customers than they could serve, straining their capacity to offer loans and allowing them to hike prices.
But they have fallen back sharply in recent months. Now the stamp duty holiday is gone, competition is reasserting itself as banks have to compete once more for customers.
Nationwide last week introduced a five-year fix for 60pc loans at a rate of 0.99pc. Ian Gordon, banking analyst at Investec, says lenders have had a
‘There is still demand, particularly for the rural properties, as people wish to de-urbanise’
profitable year and will still make good margins on mortgages even if they cut rates further, due to their very low cost of funding. “There is scope for further reductions,” he says. “All of the large banks are still expressing an appetite for mortgage lending.”
Buyers with a 25pc deposit paid an average rate of just 1.6pc on a five-year fix last month, according to the Bank of England. That is a record low, down from 2.54pc five years ago and 4.9pc in 2011. Then there are household savings. Families racked up in the region of £200bn of savings in the pandemic after effectively being “forced” to put money aside as they could no longer put it towards socialising, foreign holidays or even routine bills such as commuting costs.
This gives them extra money for that property deposit, or to bid a little bit higher to clinch the purchase of a particularly desirable home.
Finally, habits are changing. The savings of the pandemic are not entirely a one-off. If some degree of working from home stays around, Beck notes that homeowners can save money on petrol or on train fares and put that towards their mortgage. This shifts the type of property people buy, pushing up prices further. Buyers are seeking bigger properties with gardens outside of city centres.
Three quarters of those looking at moving said they were thinking of doing so regardless of the stamp duty cut, according to a Nationwide survey.
“The longer the pandemic lasts, the more likely this reasoning will also persist,” said Robert Gardner, the building society’s chief economist.
Scotland’s break on Land and Buildings Transactions Tax, the equivalent to stamp duty, came to an end in March. It offered a smaller saving than that available south of the border – up to £2,100 compared to £15,000 – but still provided a valuable incentive to complete on sales before the deadline. Prices dipped in April, according to the Office for National
Statistics, as the average property in Scotland went for just under £162,700, down from more than £168,500 in the weeks before the tax holiday ended. That was still up from £152,000 a year earlier. Crucially, prices recovered almost immediately from that post-tax break blip, hitting a record high just short of £171,500 in May.
In England, chartered surveyors are seeing a similar pattern. “We have not noticed any turndown – we are still busy,” says Chris Philpot of Lacy, Scott and Knight in Stowmarket, Suffolk. “There is still demand, particularly for the rural properties, as people wish to de-urbanise.” That bodes well for owners in the country, if not for would-be buyers who have to stretch ever further for a home of their own.