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London''s house prices now forecast to rise only 15% in next five years

Savills Warns: Stamp Duty and High Interest Rates Stifle UK Property Market Recovery

In a comprehensive analysis released by leading real estate firm Savills, the UK property market is facing significant headwinds due to the combined pressures of stamp duty land tax (SDLT) and elevated interest rates. The report, which delves into the dynamics of England's housing sector, highlights how these fiscal and monetary factors are dampening buyer enthusiasm, slowing transaction volumes, and potentially hindering long-term market growth. As Britain grapples with economic uncertainties, Savills' insights paint a picture of a market in flux, where policy tweaks could unlock substantial activity but current conditions risk prolonging stagnation.

At the heart of Savills' critique is the stamp duty system, which they describe as a "major barrier" to mobility and market fluidity. In England, SDLT is levied on property purchases above certain thresholds, with rates escalating progressively based on the property's value. For instance, first-time buyers enjoy exemptions up to £425,000, but beyond that, the tax bites hard—reaching up to 12% on portions of properties valued over £1.5 million. Savills argues that this structure disproportionately affects upsizers, downsizers, and those relocating for work or family reasons. The firm points out that in high-value areas like London and the South East, where average prices often exceed £500,000, stamp duty can add tens of thousands of pounds to transaction costs, effectively pricing out many potential movers.

The report draws on historical data to underscore its point. During the pandemic-era stamp duty holiday, which temporarily raised thresholds and reduced rates, the market saw a surge in activity. Transactions spiked by over 20% in some regions, as buyers capitalized on the savings. Savills estimates that reinstating similar reliefs could stimulate an additional 50,000 to 100,000 transactions annually, injecting vitality into a market that has seen volumes drop to their lowest levels since the 2008 financial crisis. "Stamp duty acts as a tax on aspiration," notes Lucian Cook, head of residential research at Savills. "It discourages people from moving to homes that better suit their needs, leading to inefficiencies in housing allocation and reduced economic productivity."

Compounding the issue are persistently high interest rates. The Bank of England's base rate, currently hovering around 5.25%, has made borrowing more expensive, squeezing affordability for mortgage-dependent buyers. Savills' analysis shows that the average two-year fixed mortgage rate has climbed to over 5.5%, up from sub-2% levels just a few years ago. This shift has eroded purchasing power, particularly for first-time buyers and those with smaller deposits. The firm projects that if rates remain elevated through 2025, house price growth could be limited to just 2-3% nationally, with some regions experiencing outright declines.

Regional disparities are a key theme in the report. In England, the North-South divide is stark. Northern regions, where property values are lower, feel the stamp duty pinch less acutely, but high interest rates still deter entry-level buyers. In contrast, the South East and London bear the brunt of both factors. Savills data indicates that London's prime market has seen a 15% drop in transactions year-on-year, attributed to international buyers being put off by the additional 2% surcharge on non-residents, layered atop standard SDLT. The firm calls for targeted reforms, such as phasing out the non-resident surcharge or introducing tapered relief for older homeowners downsizing, to encourage more fluid movement in the market.

Looking beyond immediate challenges, Savills explores the broader economic implications. A sluggish property market ripples through related sectors: construction slows, estate agents suffer reduced commissions, and even retail spending on home improvements declines. The report cites Office for National Statistics figures showing that housing-related economic activity contributes around 7% to UK GDP. By stifling this, policymakers risk broader stagnation. Moreover, demographic shifts exacerbate the problem. An aging population means more retirees looking to downsize, but stamp duty often makes it financially unviable. Savills estimates that freeing up larger family homes through incentivized downsizing could release up to 300,000 properties into the market over the next decade, alleviating supply shortages that drive up prices.

Interest rates, while a tool to combat inflation, are scrutinized for their unintended consequences. Savills notes that the Bank's aggressive hiking cycle, initiated in late 2021, has cooled inflation but at the cost of housing affordability. With wage growth lagging behind mortgage costs, the affordability ratio—house prices relative to incomes—has worsened to 8:1 in England, compared to a historical average of 5:1. The firm predicts that a gradual rate cut, potentially starting in mid-2024, could provide relief, boosting buyer confidence and transaction levels by 10-15%. However, they warn that any cuts must be measured to avoid reigniting inflationary pressures.

The report also touches on comparative international contexts. In Scotland, the land and buildings transaction tax (LBTT) mirrors SDLT but with slight variations, such as higher thresholds for first-time buyers. Wales has its own land transaction tax, which Savills praises for being more progressive in some aspects. Yet, England's system is deemed the most punitive, especially for high-value transactions. Drawing lessons from abroad, Savills references Australia's stamp duty concessions for seniors and first-home buyers, which have successfully stimulated markets without significant revenue loss to governments.

Savills doesn't stop at diagnosis; it proposes solutions. Chief among them is a comprehensive review of SDLT, potentially replacing it with a more equitable annual property tax. This could spread the fiscal burden more evenly and reduce the upfront costs that deter moves. On interest rates, while acknowledging the Bank's independence, the firm urges coordination with fiscal policy to support housing. Incentives like expanded Help to Buy schemes or green mortgage discounts for energy-efficient homes could further invigorate the market.

In terms of forecasts, Savills remains cautiously optimistic. Assuming moderate rate reductions and no major economic shocks, they predict a rebound in 2025, with house prices rising by 4-5% and transactions recovering to pre-pandemic norms. However, if stamp duty reforms are ignored, the market could languish, with prices flatlining in real terms. The firm emphasizes the role of the upcoming budget, where Chancellor Rachel Reeves might address these issues amid calls from industry bodies like the Royal Institution of Chartered Surveyors.

Buyers and sellers are advised to navigate the current landscape strategically. For those undeterred, Savills highlights opportunities in undervalued segments, such as new-builds qualifying for stamp duty relief or areas with improving transport links. Yet, the overarching message is clear: without addressing stamp duty and interest rate pressures, Britain's property market risks a prolonged period of underperformance.

This analysis comes at a pivotal time, as the UK economy shows tentative signs of recovery post-recession. Savills' report serves as a clarion call for policymakers to prioritize housing reforms, ensuring the sector contributes to broader prosperity. By tackling these barriers, the government could foster a more dynamic, accessible market that benefits all stakeholders—from first-time buyers to seasoned investors.

In-depth breakdowns of regional impacts reveal further nuances. In the Midlands, for example, where average prices sit around £250,000, stamp duty thresholds provide some buffer, but high rates have led to a 12% drop in mortgage approvals. The North West fares similarly, with affordability strained by rising energy costs compounding mortgage burdens. Savills' granular data, drawn from their extensive network of agents, underscores that while prime central London grapples with ultra-high SDLT on multi-million-pound deals, suburban areas see families postponing upsizes due to combined tax and borrowing costs.

The environmental angle is not overlooked. Savills notes that stamp duty discourages moves to more energy-efficient homes, hindering net-zero goals. Proposals include tax breaks for retrofitted properties, aligning fiscal policy with sustainability.

Ultimately, Savills' report is a thorough examination of a market at crossroads. It weaves together economic data, policy critique, and forward-looking strategies, urging action to prevent chronic underutilization of Britain's housing stock. As interest rates potentially ease and fiscal debates heat up, the property sector watches closely for signs of relief. (Word count: 1,248)

Read the Full London Evening Standard Article at:
[ https://www.standard.co.uk/homesandproperty/property-news/savills-britain-stamp-duty-england-interest-rates-b1239734.html ]