House prices may rise to reflect the tax holiday

The new stamp duty rules give an immediate stamp duty holiday to any first-time buyer paying less than £250,000 for a property. The rate was formerly 1 per cent on homes between £125,000 and £250,000, so the temporary removal of the tax for two years will save a buyer up to £2,500.

The move has made about 70 per cent of properties for sale free of tax, according to Rightmove. But house prices may rise to reflect the tax holiday, as sellers will be less keen to negotiate cuts.

For the next two years, properties under £250,000 will carry a zero levy, while those over £250,000 will be charged at 3 per cent on the total value of the sale.

Santander, which includes Abbey and Alliance & Leicester, said the cut could benefit as many as 3.8 million potential first-time buyers. But Rightmove warned that the savings would not be enough to overcome first-time buyers’ biggest challenge: saving the larger deposits that lenders demand.

The anticipated £520m loss in revenue to the Treasury from the stamp duty holiday will be partly offset by a rise from 4 per cent to 5 per cent in the duty on homes bought for more than £1m. But rather than slowing down the market for “prime” property, experts are predicting a new boom, as buyers and sellers have a year to beat the deadline before the new rate is introduced.

This is likely to encourage sales before the implementation date, giving a further boost to the top end of the housing market and creating an additional stimulus to a market already rising due to the improving global economy, the weakness of sterling and the increasing availability of debt.

This view appears to be confirmed by Treasury forecasts of a £90m rise in stamp duty revenue on £1m-plus properties in the 2010/11 tax year, even before the new rate comes into force.