How to Fix Britain’s Broken Housing Market (Part 2)
Whilst our ridiculous planning system has caused this crisis, the rapid rise in stamp duty rates has certainly made the problem considerably worse. At the start of 1997 the top rate of Stamp Duty was just 1%, whilst now many ordinary homes fall into a 5% tax bracket. Stamp duty rates rose steadily under the Labour government from 1997-2010, whilst then Chancellor of the Exchequer George Osborne’s 2014 reforms replaced the previous “slab” system with a more sensible “slice” system. The “slab” system charged homebuyers a percentage of the full purchase price as soon as it hits certain thresholds, which led to a clustering of house prices just below these arbitrary thresholds. The current “slice” approach has different percentage rates applied to each portion of the price, removing this clustering problem.
The 2014 reforms also led to less stamp duty being paid for housing transactions under £937,000, a positive development. However, the top rates that Osborne introduced are economically illiterate. There is no levy under £125,000, then 2% up to £250,000, 5% up to £925,000, 10% to £1.5 million, and 12% above that. The increase in the tax rates at the top of the spectrum have led to the problem of many elderly homeowners not being able to downsize due to the lack of demand for their valuable homes, choking the top end of the housing market. This will have stopped many young families move into the homes their growing families need whilst elderly couples have several spare bedrooms left wasted.
A study by Oxford Economics found that the Exchequer received £370 million less in additional stamp duty than the £700 million it expected following the changes made by George Osborne. This was due to a steep decline in high-end property sales and cost the economy nearly £1 billion because of a reduction in people selling homes or doing jobs such as removals or renovations.
Stamp duty is a fundamentally bad tax: it punishes people for moving home, thus indirectly penalising people for moving areas to take their ideal job or moving to a house size their family needs. This causes either longer commutes, which have economic costs, or people turning down jobs they would be more productive in, reducing the efficiency of the labour market. The number of people in the UK spending at least two hours commuting each day rose by a third to more than 3.7 million between 2011 and 2015, this is a huge drain on the economy as most people cannot be as productive sat in a traffic jam or crammed onto a commuter train. The UK’s 25.9 million non-home workers are cumulatively missing out on £148bn a year in the unpaid time it takes to get into the office, and this cost is rising rapidly.
A report by the London School of Economics and the VATT Institute for Economic Research found the rate of home moving would rise by 27% if stamp duty was abolished entirely. This could mean 329,000 families moving into their ideal home each year who otherwise would not. In an ideal world, this tax leads to huge inefficiencies in our economy and should be abolished.
The problem with this however is, as always, political. Stamp duty receipts have risen rapidly in the past few years: from £2.9bn in 2008-09 to £8.6bn in 2016-17. Thus, it is now a vital source of revenue for the government, and is therefore entrenched and hard to get rid of. A second-best solution could be to, for example, halve each of the rates, and the revenue should not fall too much, and may even increase due to increased activity in the housing market. For example, Lord Lawson halved the rate of stamp duty whilst he was Chancellor and revenue actually increased.
Overall, the housing market is one of the biggest issues facing the UK economy and could drastically effect our direction of travel politically if it is not dealt with now. The solutions to this problem are relatively simple, but politically very difficult. The Tories must be brave and act now to alleviate this crisis, or they will continue to entrench the UK’s housing problems that are holding back younger generations from fulfilling the dream of home ownership, which their parents and grandparents took for granted.