What does the stamp duty cut mean for housebuilders?

Even if you don’t directly hold stocks in UK housebuilders you might be exposed to these behemoths through your pensions or other investments; historically they’re decent dividend payers and income is attractive. So, your ears might have perked up upon hearing the new Chancellor pulled a cut to stamp duty out of his hat during his “mini-budget” along with all the other rabbits that have set markets abuzz. Stamp duty has long been perceived as a “bad tax”, a monetary boulder that often gets in the way of house market fluidity, making downsizing a particular issue because of the costs involved for those going the other way. But is taking a chunk off the bottom of that boulder really the best way to solve the housing conundrum that has plagued the UK for decades?

It’s fair to say the sector’s been under the cosh for most of the year with share prices taking a massive hit. Commodities and labour costs have squeezed margins, concern about the cost-of-living crisis has dented confidence that the housing market will keep simmering and cladding issues have lingered like bad smell, though in that case it does seem that a new chapter has finally been started. So, it wasn’t surprising that speculation that the new Chancellor was gearing up to make major changes to stamp duty prompted a flurry of renewed interest from investors. They only had to look back a matter of months to see the affect changes to this land tax could have on the market with the former Chancellor’s ‘Covid holiday’ creating an incentive that house buyers were quick to grab hold of.

How the big UK housebuilders have performed in 2022

Source: Sharepad; date to 12pm 27 September 2022

"With a shroud of opacity pulled down over rate expectations some mortgage lenders have pulled certain products off the shelves completely, creating concern that the house price bubble might be about to burst."

The excitement was short-lived, with the not-so-mini fiscal event sending shockwaves through markets and prompting expectations that the UK’s central bank would have to raise interest rates faster and further than had been anticipated. With markets now pricing in the prospect of 6% by next spring increased mortgage costs are expected to negate any benefit to house buyer budgets or sentiment. Plus, with a shroud of opacity pulled down over rate expectations some mortgage lenders have pulled certain products off the shelves completely, creating concern that the house price bubble might be about to burst.

UK interest rate

Source: Refinitiv; Bank of England base rate

Stamp duty – boom or bust?

And all that aside, is fiddling with stamp duty actually the best way to bolster Britain’s housing market? The temporary stamp duty holiday which created a stampede by buyers to close before it ended has been blamed for pushing up prices, and it’s a trend which has continued into 2022. Over the 12 months to July the average UK house price jumped by 15.5%, which the Office for National Statistics says is the biggest increase in 19 years. When you consider that you now have to shell out £292,000 for an average property that means would-be buyers have to save a whopping £29,000 just for the deposit and that’s before having to fork out around £1,200 a month on mortgage payments. Many of the so called “generation rent” feel the dream of homeownership is a pipe one. That feeling’s grown more acute with no sign of a replacement for the soon-to-be-defunct Help to Buy scheme which might have drawn more plaudits than a rate hike, particularly from those on lower incomes.

"Supply is the elephant in the room and clearly housebuilders will be keeping a close eye on how demand is impacted by the current economic turmoil."

But there was a nugget in the “mini-budget” that hasn’t garnered many headlines but could be the key that unlocks a rapid period of house building. Investment zones would enjoy streamlined planning rules, enhanced tax benefits and local authority support. The government says it’s in talks with 38 areas in England and plans to offer similar enticements Scotland, Wales and Northern Ireland. This is unlikely to create a “blank canvas” for housebuilders to act unilaterally as councils will still have to answer to their constituents when polling day rolls around.

And it’s not exactly a new idea, but it could present a real opportunity for housebuilders and for the house-buying public. Supply is the elephant in the room and clearly housebuilders will be keeping a close eye on how demand is impacted by the current economic turmoil but building more means selling more. Price will be watched keenly, and developers will be hoping that a streamlined process would bring down costs.

The right homes in the right places with the right price is clearly the golden ticket and developers that can create energy efficiency enhancements will have an additional string to their bow. Cost is a factor but being able to offer cost-cutting measures could counterbalance that.

There are a lot of ifs, buts and maybes which investors would do well to factor in, but if the new Prime Minister is serious about growth housebuilders will need to play a big part and they won’t play ball if they don’t like the odds placed on the game.

Past performance is not a guide to future performance and some investments need to be held for the long term.