Property tax rumors cause August house price drop

The typical home's value fell in August, according to the latest figures from Nationwide Building Society, as speculation over tax changes 'risks sending prices lower'.

House prices edged down by 0.1 per cent or £1,585 over the month, its figures showed. It means the average UK property is currently worth £271,079, which is 2.1 per cent higher than in August last year. However, it means average house prices are lower than at their peak in August 2022, when they hit £273,751.

Tom Bill, head of UK residential research at estate agent Knight Frank thinks rumours about changes to property tax that Chancellor Rachel Reeves could make in the upcoming Budget risk further house price falls. 'House prices have drifted lower since March as the market digests higher rates of stamp duty and supply continues to outstrip demand,' said Bill. 'Steady mortgage rates mean transaction numbers have improved over that time but the recent property tax speculation risks sending both sales and prices lower as buyers and sellers deal with pre-Budget uncertainty for the second year in a row.'

Robert Gardner, chief economist at Nationwide said house prices are still 'unaffordable' relative to long-term norms. The average UK house price is currently 5.8 times the average annual salary of someone in full-time work, well above the long-run average of 4.8, times, Nationwide said. It comes as rumours have circulated around potential changes to stamp duty, council tax and capital gains tax which could be made in Chancellor Rachel Reeves' Autumn Budget.

Rachel Reeves is rumoured to be considering plans to scrap stamp duty and council tax in favour of a new system. Potentially, it could see the stamp duty bill homeowners pay on purchase could be scrapped in favour of an annual tax for homes above £500,000. The Chancellor is also rumoured to be considering charging some homeowners a levy if they sell their home and make a profit. At the moment, people don't have to pay capital gains tax if they sell the home they live in and the price has increased since they bought it. But according to The Times, Reeves is considering changing the rules so that capital gains tax would become payable on the sale of homes worth more than £1.5million.

On residential property, capital gains tax is currently charged at 18 per cent for basic rate taxpayers, and 24 per cent for higher rate taxpayers – but with any significant gain, people are likely to pay most of it at the higher rate. This is because a capital gain is added to a person's normal income to decide the tax rate. The Times said a threshold of £1.5million would hit around 120,000 homeowners who are higher-rate taxpayers with capital gains tax bills of £199,973.

Nationwide also highlighted high mortgage costs as a continuing challenge, especially for first-time buyers. It said the average earner buying the typical first-time buyer property with a 20 per cent deposit faced a monthly mortgage payment equivalent to around 35 per cent of their take-home pay, well above the long-run average of 30 per cent. Gardner added: 'House prices are still high compared to household incomes, making raising a deposit challenging for prospective buyers, especially given the intense cost of living pressures in recent years. 'Combined with the fact that mortgage costs are more than three times the levels prevailing in the wake of the pandemic, this means that the cost of servicing a mortgage is also a barrier for many.'

House prices will become more affordable if peoples incomes continue to rise and house prices remain flat. Further decreases in interest rates could also help, as this would reduce mortgage rates . Gardner said this would 'support buyer demand, especially since household balance sheets are strong and labour market conditions are expected to remain solid.'

House prices are falling for two reasons, according to Jonathan Hopper, chief executive of buying agent Garrington Property Finders; 'a flood of supply which has made this a buyer's market and a 'back-to-school' reality check among sellers. 'Lesson one is a crash course in economics - and the power of supply and demand,' says Hopper. 'Deals are being done, but in many parts of the country there are many more sellers than serious buyers, and this is allowing buyers to take their time and negotiate hard on price.

'In response sellers are being forced to price their homes keenly just to get potential buyers through the door. 'While interest rate-sensitive purchasers such as first-time buyers remain very active, discretionary buyers higher up the property ladder are starting to adopt a 'wait and see' approach in response to reports of potential tax reforms in the Autumn Budget.'