Government axes stamp duty for first time buyers

Government has scrapped stamp duty for most first-time buyers. It won't solve the housing crisis, but it's a step in the right direction.

Of the housing policies announced in today’s Budget, none has made a splash quite like the axing of stamp duty for first-time buyers on properties up to £300,000, and cutting of stamp duty on properties up to £500,000.

PricedOut thinks cutting the tax is a small step in the right direction. Although the tax is dwarfed by the vast sums of money first-time buyers need for a deposit, any step taken toward removing this punitive barrier on housing mobility is to be welcomed.

It’s unusual for us to praise a policy that adds more demand to the housing market. We have led the opposition to Help To Buy schemes because they throw money at the housing market and fail to build any more homes, and we continue to call for their abolition. But stamp duty is different. It makes first-time buyers have to save even longer after saving their deposits, house prices rising all the time, so that homeownership is artificially further out of reach.

 

Why don’t we like stamp duty?

Stamp duty is a tax on transactions in the housing market. It gums up the housing market by penalising people who choose to sell and buy homes. Although it’s the buyer who pays the tax, in reality much of the incidence falls on the seller – if there were no stamp duty, buyers would end up paying a higher price. There isn’t good data on whether the price they’d pay would be high enough to completely cancel out the stamp duty.

As well as the financial cost, Analysis by LSE has shown that a two percentage point difference in stamp duty affects housing mobility by 40%. People are much less likely to sell their home (making it available to a first-time buyer) when stamp duty is high. Although the seller will move into a new home, so leave the total demand/supply position of housing unchanged, we know that increased transactions – and therefore increased liquidity – in the housing market means more choice for buyers.

There is also clear evidence of a strong link between housing market transactions and housebuilding. Now that the government shares our wish to increase housebuilding to 300,000 homes per year, measures to get more people buying and selling may well create the market conditions to help get the homes we need built.

 

 

In the long term, we’d like to see stamp duty axed not just for first-time buyers, but all buyers who plan to live in the home they’re buying. Second steppers – those who already own a home and want to move, either upsizing after having children, or moving home to a different location – typically pay more in stamp duty than first-time buyers because they tend to move to larger homes. Thus the tax acts as a disincentive for them to move, and prevents their homes becoming available for younger adults hoping to buy.

Stamp duty on housing transactions is a major source of tax revenue for the Treasury. It is right that we should raise public funds from the housing market, but there are much fairer ways for the government to make up the revenue from regular property taxes borne by owner-occupiers and landlords. We’d like to do some research into workable models of land value taxation, as called for in Labour’s recent manifesto. But short of that, revaluing house prices for council tax and adding more bands as many have suggested could see owner-occupiers of expensive homes paying their fair share.

We also struggle to see any justification for capital gains tax relief on primary residences – homeowners are getting away with paying nothing on tens of thousands of pounds of wealth from house price inflation that is totally unearned.

 

Will this announcement benefit aspiring first-time buyers?

This change gives first-time buyers an additional upper hand on buy-to-let landlords, adding to the help already afforded by the stamp duty surcharge on second homes. In areas where first-time buyers are competing with BTLs, the first-time buyers will have a clear advantage.

The cut will also nudge sellers to put their homes on the market, which will provide first-time buyers with more choice of property and help find a home to fit their needs. Early estimates suggest 3,500 more aspiring FTBs a year will become owners because of the change. Although this isn’t groundbreaking, every little helps.

The Office for Budget Responsibility estimates that this measure will increase prices by just 0.3%. The small scale of this change is a drop in the ocean in terms of fluctuations in house prices. It must be noted that the OBR have heavily caveated their forecast as being highly uncertain, so care must be taken about jumping to definitive conclusions based on their analysis.

 

Our verdict

This policy will not solve the housing crisis. The crisis of affordability can only be solved by a sustained increase in housebuilding in areas of high demand. To that end, government’s hints at planning reform and upping the cap on what councils can borrow to build might do more, although the devil will be in the detail.

But any step towards a tax system that doesn’t penalise people who want to move home and free up housing is a step in the right direction.


Showing 2 reactions

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  • commented 2017-11-23 15:40:34 +0000
    Seems like an odd take.

    3,500 FTBs = “every little helps”. 0.3% rise = “a drop in the ocean”

    It’s expensive for a policy that does almost nothing to help FTBs and nudges up house prices. Surely it’s just another step in the same (wrong) direction as Help to Buy.
  • commented 2017-11-23 08:52:55 +0000
    PricedOut seems to be losing the plot. Previous stamp duty ‘holidays’ (e.g. the one that ended in March 2012) resulted in the savings made on stamp duty being more than swallowed up by resultant inflation, which comes about not because of increased purchasing power but because of the perception that significant savings are being made. The OBR is right to point out that this will have an inflationary effect, but I think that the estimate of 0.3% is naïve in the extreme.

    Besides, stamp duty is not a significant impediment to home ownership anyway. If you purchase a home for £220K, then the stamp duty on that will be £1,900, adding only £190 to the 10% deposit you’ll need for your mortgage.

    The issue is that successive governments since the crisis have pulled out all the stops to keep prices inflated through demand-side measures, which is merely normalising excessive debt and risking an even bigger crash. The UK’s housing crisis needs to be dealt with at the supply end, which we can either do by taking a couple of decades to build our way out of the crisis (encumbering an entire generation with excessive debt in the meantime) or by campaigning for legislation that makes it financially unappealing for BTL landlords to hold on to their portfolios, thus flooding the market with habitable properties fairly quickly. There isn’t a shortage of homes in this country – we’re living in them – but there is a shortage of homes for sale. PricedOut needs to stop making concessions to the home-owning class and campaign for radical change.