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If the Conservative Party wants to revive its fortunes before the next election, then finding ways to avoid a recession would surely help. And while I am very much in favour of abolishing inheritance tax, a perverse levy that promotes inefficient investments, abolishing stamp duty would give a much bigger boost to the economy.
Both taxes raise insignificant amounts of money, but abolishing stamp duty would help people move to more productive employment, help them afford to have children as well as boosting all of the trades and professions associated with moving house.
That’s not just estate agents, solicitors and mortgage brokers, but also removal companies, furniture companies, painters and decorators, builders and even curtain makers.
If we look at a population pyramid of the UK, it is in fact much more cylindrical.
Unlike many developing nations with ballooning younger generations or some developed nations with top-heavy older generations, the UK has about the same number of people in their early 20s as people in their early 70s. Which should mean that there are as many people entering the housing market as leaving it.
There is also a similar number of people in their late 30s who should be buying family homes as there are people in their early 60s who should be downsizing. There really ought to be enough housing in the UK, if everyone would just keep moving.
But people aren’t moving – and one reason for this is the cost of doing so. The largest transaction cost for most buyers is stamp duty.
It mostly hits higher-value family houses in cities with higher-paying jobs, and consequently has kept many people living in houses that are too small for their needs and possibly prevented them from moving to take a better job.
The UK housing market has several problems. Many economists are sure that all we need to do to fix it is increase supply. But cutting the property tax would be just as effective and easier, removing a transaction cost with no obvious service and thus encouraging people to move.
I am not entirely sure why George Osborne, a Conservative chancellor, decided to increase the tax by even more than Labour chancellor Gordon Brown. But I am even more baffled as to why no subsequent Conservative chancellor has reduced or removed it.
All Mr Osborne’s and Mr Brown’s increases in the tax burden have achieved is to pull several rungs out of the London housing ladder for people trying to buy a family home.
Taxing private home ownership in the UK makes no sense. Housing is not a consumer choice – we literally could not survive in this climate without it. And the Government could not possibly provide enough social housing for the whole population.
The main problem with high residential property taxation is that it comes out of your savings – otherwise known as your deposit money. You can’t include it in the mortgage – it is a sunk cost.
If someone living and working in London today moved as often as people did before the interventions of Mr Brown and Mr Osborne, then they would pay hundreds of thousands of pounds in this additional tax. And every time they moved, they would have slightly less money to use as a deposit.
This is not good economics, as it requires buyers to borrow more. Higher loan-to-value mortgages makes the housing market more precarious.
As the economy is teetering on the edge of a recession due to higher interest rates – it would be better if mortgaged homeowners had a larger equity cushion to weather any fall in property values.
Instead, the Government is taxing, up front, any potential profits from owning a house. The owner takes the risk that by the time they sell, their home’s value would have appreciated enough for them to pay off the mortgage and get back the money they paid in stamp tax.
If we account for inflation as well as mortgage interest, house maintenance, improvements and repairs and the VAT added to them – most homeowners will be lucky to breakeven, even in a rising market.
If house prices stagnate or start to fall, we should expect to see a grid-locked housing market – and who would want to pay 5pc or 10pc in stamp duty to move to a larger house if that house is also likely to fall in value? Lower transactions are already apparent in HMRC’s latest report with stamp duty receipts almost 30pc lower so far this financial year compared to last year.
Removing the tax for cheaper houses and first-time buyers has only exacerbated the problem by increasing demand in the sector of the market where the UK has the most limited supply – affordable homes.
At the same time existing owners of affordable homes are unwilling to sell and move to their “second-time buyer” home, even if their space requirements have changed. If they live in London or the South East, as 32pc of England’s population do, then their stamp duty payments could be exceptionally large.
According to Home.co.uk the average sale price of all types of residential property in London in June 2023 was £875,431, to which £31,271.55 would be added for stamp duty, while an average terraced house would pay £38,769.50 in stamp duty, the average semi £58,809.80 and the average detached house a whopping £263,477.12.
Meanwhile those trading in shares incur just 0.5pc in stamp taxes, allowing millions of shares to be traded daily in London without anyone hesitating to consider the cost of stamp duty before doing so.
In the financial year 2021-22, just £10.2bn was raised by residential stamp duty. About half of this came from London.
Considering total UK tax receipts were £731.1bn overall that year, stamp duty adds very little to overall tax revenue. It entrenches people in the wrong-sized home and makes it more difficult for people to start families or move to more lucrative jobs.
Expensive family housing may also be why the UK’s population pyramid shows that every age group below 25 is smaller than any age group between 25 and 65. The Government has made it too expensive to have children in the UK, hence our industries rely on importing their workforce.
There is another downside to high stamp duty – it discourages high net worth individuals and corporation executives from moving to the UK. Even though attracting more high earners to Britain would probably raise more money in income tax than stamp duty – the top 1pc of earners presently pay 28pc of all UK income taxes.
There is only a 1pc tax on property purchases over $1m (£820,000) in New York City – London’s main financial centre rival – while in central London foreign executives could be paying up to 15pc. Unless this changes, we shouldn’t be surprised if executives chose to remain in New York and Zoom into meetings when required.
Abolishing stamp duty completely, or reducing it to the same level as shares to cover property registration costs, would help get everyone into the right sized or correctly located home for their needs. We may even find that we don’t really have a housing shortage after all.
Catherine McBride is an economist and a fellow at the Centre for Brexit Policy
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