UK stamp duty change will have little impact and house building targets are ambitious

The abolition of stamp duty for most first time buyers in the UK is likely to have a minimal impact on activity in housing market activity in 2018 and there is scepticism that Government home building targets will be met.

While the announcements made in the Budget a few weeks ago were hailed as hugely significant for housing market growth, an outlook report from the Royal Institute of Chartered Surveyors (RICS) points out that many of the new policies are not due to come into effect until 2019 and 2020.

It says there are doubts around the new Government target of delivering 300,000 homes a year by the mid 2020’s. In particular RICS explains that while on the face of it, if the 12% increase in new home creation recorded in the 12 months to the end of the first quarter of 2017 was maintained it would take just three more years to hit the 300,000 mark but in reality this is more difficult to achieve.

It explains that nearly 18,000 of these additional dwellings came from office conversions under permitted development rights and it says it seems improbable that such conversions can continue to make such a hefty contribution at 8% indefinitely.

Furthermore, it says, housing delivery across the country is hugely dominated by the large private sector house builders and, as the Government itself has acknowledged, it is unrealistic to expect this group alone to make up the deficit in supply, with their current pipeline pointing toward an increase of around 10% in the number of units developed over the next two or three years.

The report says:

‘If the Government is serious about increasing supply to a degree that would hit the 300,000 per year target, we suspect that a comprehensive house building programme incorporating direct commissioning by central and local Government would be needed.’

It says that the most positive announcements relate lifting the local authority borrowing cap for house building which should benefit the provision of affordable council homes at some scale. And new money for the Home Builders Fund should help smaller house builders.

The report points out:

‘Nevertheless, more details are required on how these policies will work in practice. In any case, even the recent uptick in housing delivery will not immediately be reflected in the second hand market, where RICS data continues to signal an acute shortage of supply.’

It also points out that the average number of properties on estate agents’ books remains very close to all-time lows, albeit stable over the past 12 months, and the dearth of inventory has come as a consequence of the sustained deterioration in the flow of fresh listings coming to market. Indeed, since the beginning of 2014, the proportion of survey respondents reporting a rise in new instructions has exceeded those reporting a fall in only four months.

But the report acknowledges that is potentially some growth to come from changes in stamp duty, although the maximum benefit is a saving of £5,000 and across the UK as a whole, the average price paid by first time buyers is around £208,000, translating into a reduction of approximately £1,660 and although not an insignificant sum, it equates to just 5% of the average first time buyer deposit of £33,000.

The report also points out that the stamp duty cut is more substantial in the UK’s most expensive regions, while for others, such as the North East of England, first time buyers, on average, already pay very little in stamp duty so it is first time buyers in London that will benefit the most.

The RICS report says:

‘On the face of it, the reduced upfront costs for first time buyers will create some additional demand amongst this cohort. For those first time buyers with less money to put down for a deposit, and subsequently more restricted by loan to value criteria, the saving on stamp duty could help them borrow more.

‘In these instances, the removal of stamp duty may enable properties to be purchased that otherwise could not have been afforded. However, in many cases, those benefiting from the relief will have purchased the property in any case and will not represent additional demand.

‘Furthermore, previous experience suggests the reduction in tax will be capitalised in house prices. The OBR estimates average house prices will rise 0.3% due to the policy change. This is backed up by HMRC analysis estimating the stamp duty holiday for first time buyers for two years from March 2010 increased prices by 0.5% to 0.7%.

‘As a result, relative to other buyers, first time buyer affordability may improve slightly, but, with higher prices offsetting the tax saving, such a small change will have minimal impact in lifting home ownership rates, a stated goal for its introduction.’

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