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17 October 2022

The Conservative dream of home ownership will evaporate in a few months

The average first-time buyer will be better off for only five months before higher mortgage payments overtake their stamp duty savings.

By Emma Haslett

On Monday (17 October), Jeremy Hunt confirmed that the government would be reversing most of the tax cuts announced by the former chancellor Kwasi Kwarteng less than one month prior. The stamp duty cut for first-time buyers is one of the only policies to survive the change of plans. This article was originally published on 7 October, and has been republished in light of this news.

Research was released earlier this month showing that the typical two-year fixed mortgage rate had hit 6.07 per cent, its highest since the darkest days of the financial crisis.

The research, by Moneyfacts, showed that at the end of last year the average two-year fixed-rate borrower was paying 2.25 per cent on their mortgage; that figure has now climbed to its highest since 2008. Anyone looking for a mortgage in the next few months can thank Liz Truss, Kwasi Kwarteng and their disastrous mini-Budget for the sudden jump in rates: because of the turmoil it created, the amount it costs banks to borrow – and therefore to lend – has climbed precipitously since.

The timing of the press release meant that just as Truss was declaring that the stamp duty cut her government announced on 23 September was “helping people onto the housing ladder – especially first-time buyers”, the reality was becoming painfully apparent. While first-time buyers now pay no stamp duty on properties worth up to £425,000 (and everyone else pays no tax on the first £250,000 of their property’s value), analysis by the estate agent Hamptons International has found monthly mortgage payments for an average first-time buyer purchasing a £350,000 property have now reached £1,637 a month – £308 more than a year ago. This means the savings the average first-time buyer will make from Truss’s stamp duty cut will be wiped out by the higher mortgage rates in 4.9 months.

[See also: Where is Liz Truss?]

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For a “second-stepper” buying a £400,000 home with a 25 per cent deposit, monthly repayments will rise to £1,607 a month, £445 more than they were a year ago – wiping out their stamp duty savings in 5.6 months. Even for “upsizers” buying a £600,000 property with a 40 per cent deposit, monthly payments will now be £529 a month higher: their stamp duty savings will be wiped out in 4.7 months. 

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The timing is particularly tricky because the last stamp duty cut, in 2020, whipped the housing market into a frenzy, and many of the people who moved then took out cheap two-year fixed-rate mortgages now scheduled to renew into much more expensive mortgages . In July, Sarah Breeden, an official at the Bank of England, estimated that a quarter of all fixed-rate mortgages, which make up around 80 per cent of the overall market, were due to renew in the following 12 months. Goldman Sachs has calculated that about 30 per cent of the UK’s 27.8 million households have a mortgage – which means that around 1.7 million households are facing a significant increase in mortgage payments before next summer, on top of those on variable rate products who are already being affected.

The fact is no one has done less to help first-time buyers than the present government. Since the Conservatives came to power in May 2010, average house prices have increased by more than 70 per cent, from £170,846 to £292,118, according to the Land Registry. This has left the Tories with a growing problem: how to pull more people onto the housing ladder while ensuring that house price growth – viewed as sacrosanct to their core voters – remained high.

The only solution was to increase the amount of debt first-time buyers took on. Thus, policies such as the Help to Buy scheme and its many iterations (FirstBuy, NewBuy, the Help to Buy equity loan scheme, the Help to Buy mortgage guarantee scheme, the Help to Buy ISA, the Lifetime ISA…) lowered the entry barrier for first-time buyers by encouraging them to sign up to enormous mortgages, some at a 95 per cent loan-to-value ratio. It kept Conservative voters happy by pushing up demand – and therefore prices – in the process.

The 2020 stamp duty holiday was just as confusing, ostensibly designed to reinvigorate the market after a Covid slump while giving first-time buyers a chance to avoid paying stamp duty, but in reality concentrating a spike in price growth into a very small period of time by only giving those buyers a year (extended from six months) in which to make that saving. The average time to buy a property, from viewing to completion, is about six months. By June 2021, when the scheme ended, annual house price growth was at 13.2 per cent, up from 2 per cent a year earlier, and just 0.7 per cent in June 2019.

The effect of all of these measures was to make home ownership increasingly unobtainable. The average income of a solo first-time buyer topped £50,000 for the first time in 2020, and rose to £50,800 in 2021, according to Barclays; the average income for joint first-time buyers was £70,500. Meanwhile, those looking to buy their first homes are taking on increasingly large debt burdens, forcing the government to engage in logic-defying mathematical contortions to make such borrowing affordable: lest we forget, in July Downing Street was reportedly considering the introduction of 50-year mortgages that could be passed down through generations. Previous generations passed down their wealth; thanks to the Conservatives, future generations will pass down their debts.

[see also: Why the housing market is about to crash]

What would really have helped first-time buyers, as Truss insists she wanted to do, would have been finding ways to provide more homes – by easing planning regulations so more can be built (she said this is coming, but has not provided any details), or by finding ways to free up existing properties that are either empty (238,000 homes in England have been classed as long-term vacant) or under-occupied.

In the meantime, the Conservatives’ policy, which Truss is merrily pursuing, is only damaging the party itself – because, come future elections, today’s first-time buyers will remember the Conservatives as the party that left them poor and indebted, and that sacrificed their home ownership aspirations at the altar of never-ending house price growth.