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Stamp Duty Thresholds And Their Effect On Prices.

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First post.

Plotting the frequency of house sales against price might be expected to produce an approximate normal distribution centred on the average selling price with a long tail of higher priced properties. However, such a graph will be disrupted by discontinuities around the stamp duty thresholds. This tax is paid by the buyer at the applicable rate on the entire purchase price once each threshold is reached. Current rates are 1% on properties over £120,000, 3% if over £250,000 and 4% if over £500,000. For example, on a house bought at £249,900, the stamp duty is £2,499, but at £254,900 it rises to £7,647. Consequently, there will be a substantial peak in the frequency of sales just below the threshold, a precipitous drop to near zero at the threshold, followed by an initially slow but accelerating rise to rejoin the approximate normal distribution curve. These threshold chasms are likely to be wider at the higher rates of duty.

The chasm above the £250,000 threshold apparently extends upto £270,000 -- buyers are reported to be unwilling to pay anything in between *. Now consider a house advertised at £299,500 for which the seller is willing to accept offers down to £270,000. If no such offer is forthcoming then to secure a sale they will almost certainly have to accept less than the £250,000 threshold -- a further fall of 7.4%. The stamp duty threshold chasm may therefore cause a more abrupt fall than might otherwise be the case.

How wide might the chasm be at the lower threshold? For a house bought at £270,000 the additional £5,600 in stamp duty represents a marginal tax rate of 28% on the £20,000 paid above the threshold. If a marginal tax rate of 25% is generally acceptable this would imply a chasm above the £120,000 threshold extending to £125,000 (stamp duty = £1,250). Although this represents a smaller drop of 4% it may have a larger impact on the market due to the volume of houses advertised in the £130,000 to £150,000 range.

Will such chasms and their proximity to average house prices be a significant factor in accelerating price falls? Could they perhaps make the crash "different this time"?

By raising the lower threshold to £120,000 in the March 2005 budget could Gordon Brown have unwittingly helped future First Time Buyers rather more than he intended?

Stamp Duty Threshold Chasm Effect?

Further research.

1. A frequency graph for a particular region or area would be useful. How wide and deep are the chasms? What volume of transactions occurs at prices that may fall within range of a chasm?

2. A longitudinal study might be interesting. Do the chasms widen and deepen as buyers take control of the market? As prices fall, how do the relative volumes above and below the chasms change?

3. A comparison with the early 90's crash may be illuminating. Did any significant chasm exist? If so, how did it relate to average house prices? What happened in 1992/93 when stamp duty was suspended?

* 'Stamp duty thresholds continue to threaten UK housing market':

http://www.easier.com/view/News/Property/article-25526.html

"We hear from many clients who are unwilling to pay ten or twenty thousand pounds over the stamp duty threshold," adds Hearnden. "That's the cost of a great new kitchen or bathroom -- they are looking for property under the threshold and keeping the cash for things they really need or want."

Many sellers are reacting to this barrier by pricing their properties on or just under the threshold in order to secure a sale."

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In my area, NE london, there is so little property below 120K it isn't possible to see any chasm.

Increasinlgy places over the upper 250K threshold are offering to pay 2% of the stamp duty,

presumably for the reasons you stated above.

These are somewhat desperate times, in a normal market (if such a thing exists), then a modality in the house prices centered around the mean of each threshold break could develop.

I'm not sure how many FTBs will ever benefit from it though.

ABB

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Excellent post Jeff. I am looking to purchase within that 250k to 300k margin. Your comments about driving down the price to below the threshold is exactly what I have been thinking for a long time.

Anything priced up to 285k in my book is fair game to be reduced to under 250k. How long before the 300k to 325k properties are forced to drop to around the 285k mark in the near future to make them sell. That is when the real fun and games will start.

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Like the idea of what you are trying to do, but not sure how well it would work as if I was to plot the last thing I would expect to see would be a normal distribution.

One thing I would REALLY like to see, but I doubt the data is out there is the a frequency chart like Jeff Ross stated, over time, against house type so that it is possible to identify what sort of houses are selling at the moment (and therefore being used in the calculation of HPI)

Having read through the full methodology of how the Nationwide calculate house prices I believe that the absence of people buying at the FTB/BTL level of the market (which seems to be the case at current) will keep HPI artificially high.

If a large number of FTB's/BTL's were to re-enter the market (yeah right!) this month HPI would drop significantly when reported because the average house price would be dragged down from its current 'reported' average.

Basically, what I am trying to say is that the distribution of houses selling at the moment is not the 'typical' one that would reflect a healthy market and that HPI is reflecting this by being too high.

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If I were trying to sell a house in this bracket I'd offer to pay the extra stamp duty to get my price, so would any vendor with any sense. Paying the difference would cost the vendor a lot less than reducing their price.

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If I were trying to sell a house in this bracket I'd offer to pay the extra stamp duty to get my price, so would any vendor with any sense.  Paying the difference would cost the vendor a lot less than reducing their price.

Point is it's a buyers bargining tool.

...and as we have seen many vendors don't have any sense. They have this idea that their property is worth X and people should pay it. It's the flexible ones that will benefit.

It's swings and round abouts anyway, a reduction be it bellow the threashold or paying the extra stamp duty does the buyer a favour.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
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      • up 5%



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