The prolonged reduction in Stamp Duty, a new mortgage guarantee scheme, and an extension to the furlough scheme should sustain high transactions volumes and prices throughout most of this year. There will still be challenges in Q4, when we expect the end of the furlough scheme to cause unemployment and arrears to rise, but not enough to force house prices down.
- The prolonged reduction in Stamp Duty, a new mortgage guarantee scheme, and an extension to the furlough scheme should sustain high transactions volumes and prices throughout most of this year. There will still be challenges in Q4, when we expect the end of the furlough scheme to cause unemployment and arrears to rise, but not enough to force house prices down.
- The three-month extension of the rise in the 0% Stamp Duty threshold to £500,000 until June will give buyers who are relying on the saving of up to £15,000 more time to exchange. And even though conveyancing is currently taking about five months, the partial reduction in the threshold, to £250,000 in Q3 (before it returns to £125,000 in October) means prospective buyers could still save up to £2,500.
- Buyer demand appeared to be weathering the planned end to the Stamp Duty holiday well anyway. (See here.) The small additional boost to demand from the tapered end of the tax break alongside the encouragingly rapid reduction in COVID-19 infection rates should mean sales instructions recover too.
- The Chancellor also reintroduced a version of the Help to Buy: Mortgage Guarantee Scheme that ran between 2013 and 2017. From April, banks can pay a fee to insure against losses of up to 20% of the house price on 90%-95% LTV mortgages. The last scheme had some success in kickstarting high LTV lending and in reducing interest rates on those loans, suggesting it will be able to do the same thing again this time around. (See Chart 1 & 2.)
- Given our view that the economy will recover quickly, banks would likely have returned to high-LTV lending anyway, as concerns about possible house price falls eased. And first-time buyer demand has held up remarkably well despite the increase in mortgage deposit requirements during the pandemic. (See here.) Nonetheless, allowing prospective home buyers who were still deposit-constrained to re-enter the market will further boost first-time buyer demand in the near term.
- The new scheme only pays lip service to the Prime Ministers previous announcement that the government would help provide affordable 5-year fixed rate mortgages at high LTVs. Within the new scheme lenders “must offer a five year fixed rate product as part of their range of mortgages offered”. But without any guidance on pricing, it seems likely to us that banks will incentivise shorter fixed rates as normal.
- The extension of the furlough scheme to September was more generous than we had anticipated, suggesting unemployment and mortgage arrears may not rise as much as we previously forecast. While the end of the scheme will still cause mortgage arrears to pick up, the increase in supply due to forced sales will now be less.
- The housing market was already faring better than we had anticipated before the raft of policy support announced today. The mortgage guarantee scheme and Stamp Duty holiday extension will sustain demand, and the more generous furlough scheme will reduce forced selling. As a result, we no longer think that house prices will fall this year.
Chart 1: New Mortgages Per Quarter
Chart 2: 90% LTV less 75% LTV Mortgage Rate (ppts)
Sources: FCA, HMT, Capital Economics
Source: Refinitiv, Capital Economics
Andrew Wishart, Property Economist, +44 (0)7427 682 411, firstname.lastname@example.org