๐๐ซ๐๐ง๐ญ๐ก๐๐ฆ ๐๐ซ๐จ๐ฉ๐๐ซ๐ญ๐ฒ ๐๐๐ซ๐ค๐๐ญ – ๐๐ก๐๐ญ ๐ฐ๐ข๐ฅ๐ฅ ๐ญ๐ก๐ ๐ฌ๐ญ๐๐ฆ๐ฉ ๐๐ฎ๐ญ๐ฒ ๐๐ฎ๐ญ๐ฌ ๐๐ง๐ ๐ข๐ง๐ญ๐๐ซ๐๐ฌ๐ญ ๐ซ๐๐ญ๐ ๐ซ๐ข๐ฌ๐๐ฌ ๐ฆ๐๐๐ง ๐๐จ๐ซ ๐๐ซ๐๐ง๐ญ๐ก๐๐ฆ ๐ก๐จ๐ฆ๐๐จ๐ฐ๐ง๐๐ซ๐ฌ ๐๐ง๐ ๐ฅ๐๐ง๐๐ฅ๐จ๐ซ๐๐ฌ?
September 27th, 2022
Last week the Bank of England increased interest rates to 2.25% and they are expected to be 3.25% by early next year. This increase will make the monthly mortgage payments more expensive for first-time buyers, an issue dubbed by some as the ‘property affordability crunch.’
It will also damage the household budgets of homeowners coming off their fixed-rate mortgages in the next 12 months.
๐๐จ ๐ก๐จ๐ฐ ๐ฆ๐๐ง๐ฒ ๐ก๐จ๐ฆ๐๐จ๐ฐ๐ง๐๐ซ๐ฌ ๐๐ซ๐ ๐๐จ๐ฆ๐ข๐ง๐ ๐จ๐๐ ๐ญ๐ก๐๐ข๐ซ ๐๐ข๐ฑ๐๐ ๐ซ๐๐ญ๐๐ฌ ๐ข๐ง ๐ญ๐ก๐ ๐ง๐๐ฑ๐ญ ๐ฒ๐๐๐ซ?
Of the 7.97 million homeowners with a mortgage in the UK, 6.1 million of them are on a fixed-rate mortgage at an average rate of 2.04%. Industry statistics show around 1.3 million homeowners are coming off their fixed rate in the next 12 months.
The current crop of fixed-rate mortgage deals available today has already had the recent increase in the base rate โpriced-inโ for weeks.
The cheapest 5-year fixed rate today for a 65% Loan to Value re-mortgage (i.e., you are borrowing 65% of the value of your home) is a mortgage rate of 3.8% with Royal Bank of Scotland (RBS).
๐๐จ, ๐ฐ๐ก๐๐ญ ๐ฐ๐ข๐ฅ๐ฅ ๐๐ ๐ญ๐ก๐ ๐๐ข๐๐๐๐ซ๐๐ง๐๐ ๐ข๐ง ๐ฆ๐จ๐ซ๐ญ๐ ๐๐ ๐ ๐ฉ๐๐ฒ๐ฆ๐๐ง๐ญ๐ฌ ๐๐๐ญ๐ฐ๐๐๐ง ๐ ๐.๐๐% ๐ฆ๐จ๐ซ๐ญ๐ ๐๐ ๐ ๐๐ง๐ ๐ ๐.๐% ๐ฆ๐จ๐ซ๐ญ๐ ๐๐ ๐?
Say an average Grantham first-time buyer bought their first home in November 2019 on a 25-year mortgage. They had a 3-year fixed-rate mortgage, and let’s assume they fixed it at 2.04% (as mentioned above), meaning their fixed-rate deal finishes next month. They have ยฃ260,000 outstanding on their mortgage, and their Grantham house is worth ยฃ400,000. They would have been paying ยฃ1,107 per month for the last three years (assuming they took out a 25-year repayment mortgage).
On the RBS deal above, they will have to start paying ยฃ1,548 per month from November when they come off their initial rate โ a rise of ยฃ441 per month in mortgage payments. Thatโs quite a rise and potential blow to their household budgets.
Yet if they pushed back the repayment term from 20 years to, say, 35 years, that reduces the payment to ยฃ1,120 per month โ something to consider if you are re-mortgaging in the coming 12 months.
๐๐ก๐๐ญ ๐ฐ๐ข๐ฅ๐ฅ ๐ญ๐ก๐ ๐ฌ๐ญ๐๐ฆ๐ฉ ๐๐ฎ๐ญ๐ฒ ๐๐ก๐๐ง๐ ๐๐ฌ ๐ฆ๐๐๐ง ๐๐จ๐ซ ๐๐ซ๐๐ง๐ญ๐ก๐๐ฆ ๐ฉ๐ซ๐จ๐ฉ๐๐ซ๐ญ๐ฒ ๐จ๐ฐ๐ง๐๐ซ๐ฌ?
PM Liz Truss and Chancellor Kwasi Kwarteng believe that cutting stamp duty will support economic growth by encouraging more people to move home or jump onto the property ladder.
Stamp duty also has other harmful side effects as it decreases labour market elasticity and curtails people from selling up and buying elsewhere, where the jobs are.
Also, stamp duty makes mature homeowners stay put in their large homes rather than downsizing. This reduction in stamp duty will encourage those mature homeowners to move, thus freeing up their large family homes for the younger families that need them.
The Chancellor doubled the zero-rate stamp duty band from ยฃ125,000 to ยฃ250,000, passing a stamp duty tax saving of up to ยฃ2,500 for all English homebuyers.
Also, tax savings are even more significant for first-time buyers, particularly in areas with high house prices, such as London and the South East. They can save a maximum of ยฃ11,250 in stamp duty โ with a new zero-rate band of ยฃ425,000, based on a higher ยฃ625,000 spend cap (i.e., the house they buy can’t be over ยฃ625,000 for them to qualify for the tax relief).
So, what effect will these stamp duty changes have on the Grantham property market? Looking at recent events in the local property market is the best place to start.
๐๐ ๐ญ๐ก๐ ๐,๐๐๐ ๐ญ๐ซ๐๐ง๐ฌ๐๐๐ญ๐ข๐จ๐ง๐ฌ ๐ข๐ง ๐ญ๐ก๐ ๐๐ซ๐๐ง๐ญ๐ก๐๐ฆ ๐๐ซ๐๐ ๐ฌ๐ข๐ง๐๐ ๐๐ฎ๐ง๐ ๐๐๐๐, ๐๐๐ ๐ฐ๐๐ซ๐ ๐๐๐ฅ๐จ๐ฐ ยฃ๐๐๐,๐๐๐. ๐๐ก๐๐ฌ๐ ๐ฐ๐จ๐ฎ๐ฅ๐ ๐ง๐จ๐ฐ ๐๐ ๐ญ๐๐ฑ-๐๐ซ๐๐!
Unsurprisingly, most housing transactions in Grantham were below the ยฃ250,000 threshold, yet irrespective of that point, itโs a saving of up to ยฃ2,500 for all future Grantham homebuyers.
Anyone currently buying a house in Grantham and not yet completed their purchase (completion is when you have paid the money for your home and collected the keys) will be in line to make this saving.
Grantham landlords purchasing buy-to-let properties will also save money with the stamp duty cut (but they will still be liable for their second home stamp duty levy of 3%).
Overall, this is a welcome move to help the Grantham property market.
Yet will the stamp duty threshold rise have the seismic effect that the Rishi Sunak stamp duty holiday did in 2021, where just under 40% more people moved home than the long-term
30-year average?
I am sure the stamp duty cut will somewhat offset the rising costs in mortgage rates mentioned in this article and cushion the blow to the property market.
A blow to what you might ask?
Well, many people judge the property market’s health by house prices.
The average value of a Grantham property stands at ยฃ261,985 and has risen 28.3% in the last five years. Not bad, eh?
But I believe there is a better way to judge the health of the local property market, and that is the number of people moving home (i.e., housing transactions).
You might be asking yourself why we should be more concerned about the number of property transactions and not the change in property values.
Many economists believe the number of property transactions is a far more accurate bellwether for the health and potency of the local housing market. A greater number of people moving home is better for the whole economy (i.e., what these changes are being made for) than a smaller number of transactions, whilst the same canโt be said for higher house prices.
๐๐จ, ๐ฐ๐ก๐๐ญ ๐ข๐ฌ ๐ ๐จ๐ข๐ง๐ ๐ญ๐จ ๐ก๐๐ฉ๐ฉ๐๐ง ๐ญ๐จ ๐๐ซ๐๐ง๐ญ๐ก๐๐ฆ ๐ก๐จ๐ฎ๐ฌ๐ ๐ฉ๐ซ๐ข๐๐๐ฌ?
I believe the growth in Grantham house prices achieved in 2021/22 is not sustainable into 2023.
In conjunction with the price cap on energy bills, the stamp duty change, the reversal of the rise in National Insurance and the drop in Income Tax will mitigate house price drops. Yet, I foresee a โslightโ realignment in the house prices being achieved in 2023, compared to 2022.
The more significant impact these changes will have is the number of people moving home in the next 12 months.
I have been forecasting a 15% to 20% year-on-year drop in Grantham property transactions in 2023. Following this stamp duty cut and the measures mentioned above, I believe it will be lower, yet around 5% lower.
To conclude, I predict we will have slightly lower house prices and fewer people moving home in Grantham, but not in any way a crash that many thought was on the horizon.
Before I go though, let me share some thoughts on whether stamp duty is a fair tax.
Now, this is almost a topic for a standalone article itself. Some economists believe that removing stamp duty (which raised ยฃ14.1bn in tax in 2021) and replacing that lost income to the Exchequer by increasing council tax on more expensive properties would do a lot more than other intended tax cuts to boost economic growth.
According to some commentators, the way UK Government taxes housing is flawed. They suggest instead of taxing an infrequent property transaction particularly harshly (the average stamp duty bill is ยฃ10,600), the Government should tax living in a house more, especially those who live in the higher priced properties.
So let us see how viable that could beโฆ
Even if council tax was frozen for bands A to D (the lower priced properties), and the uplift between the more expensive council tax bands was doubled on each step between band D and H (so a typical band E property owner would see their council tax rise from ยฃ2,473 to ยฃ3,628 per year and a typical Band H see a rise of from ยฃ3,435 per year to ยฃ5,790 per year), such massive increases in council tax would be political suicide for the wealthy Tory voting homeowners and only raise ยฃ5.28bn โ a long way from the ยฃ14.1bn currently raised.
Now, if the ยฃ14.1bn tax raise were spread evenly over all council tax bands, the average band D property would need to rise by ยฃ490 per year, and even a band A would increase by an extra ยฃ382 a year โฆ something that again would be political suicide.
Yes, stamp duty is flawed. It’s just every other option has more significant flaws.
Anyway, these are just my thoughts. Tell me, people of Grantham, what are your thoughts on the Budget, the stamp duty changes or whether stamp duty is fit for purpose and what you would do if you were the Chancellor to bolster the British property market?