22 February 2021

How Sunak can stamp his authority on the housing market – at a bargain price

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Regular readers of this website will know we’re not huge fans of Stamp Duty. 

Long before Rishi Sunak decided to put in place a very substantial holiday to boost the construction industry, we were railing against the iniquities of SDLT. I shan’t repeat all those arguments, suffice to say it’s a bad tax that depresses housing transactions and has all sorts of nasty knock-on effects.

So Sunak’s six-month holiday was great news. Not only would it put wind in the sails of housebuilders, sellers and would-be homeowners, but it would offer an excellent glimpse into how much better things would be without Stamp Duty. (Full disclosure: as someone currently trying to buy a home, I have a fairly intense personal interest in this topic…)

So hats off to my CPS colleague Jethro Elsden, who has crunched the numbers on 2020’s housing starts and transaction numbers to show just how dramatic an impact the holiday has had.  You can read his full report here, but there are a few stats worth highlighting. 

First, the holiday has clearly inspired a massive surge in transactions, from 132,090 in Q2 of 2020, up to 316,300 by Q4. Granted, some of this activity will simply have been brought forward by people who might have moved anyway, but the difference is still pretty startling. It’s worth remembering just what a trough the pandemic had caused. In May we had just 9,400 home purchases approved – by December that figure had risen to 103,000, an increase of over 1000%. Even with the incredibly weak first half of 2020, overall the year finished with approvals higher than any year since 2007.

Even more interesting, though, is the effect Sunak’s policy appears to have had on construction.

Between Q2  and Q3, the number of new builds started rose by 134% from 17,580 up to 39,880. Over the same period, the number of new builds completed rose by an even more  impressive 164%, from 16,310 up to 43,070. Clearly, knowing there would be demand for new properties gave housebuilders the confidence to really start motoring – bear in mind too that this is with the numerous restrictions and various other Covid-induced difficulties facing the industry. It’s reasonable to suppose the numbers could have been even more impressive in a non-pandemic world.

So why not just keep make the holiday permanent?

The main argument seems to be a pretty basic one: that stamp duty raises quite a lot of money for the Treasury, at a time when the public finance have taken an absolute hammering. Again though, this relies on a static analysis of the ‘tax goes up, money comes in’ variety. In the case of SDLT, it’s clearly not that simple. Tax goes down does not necessarily mean revenue falls commensurately, because there are all sorts of positive knock-on effects from the extra transactions the holiday has inspired.

It’s difficult to quantify the behavioural effects of a tax change, but Jethro’s estimate is that all things considered, the holiday has only cost the Treasury somewhere between £300m and £1bn – and that’s before accounting for the economic activity generated by all those extra transactions, which also generates revenue for the Treasury, so the real cost of the holiday is almost certainly far lower than even this modest sum.

Then there are the positive spin-offs for the housing market of people being able to move more easily to homes that actually fit their needs. That’s particularly important for older people who may own a much larger home than they need, but are chary of moving because of the costs involved.

If the fiscal rationale for SDLT is this flimsy, that surely has important implications for future policy. Indeed, Jethro’s paper estimates that permanently increasing the tax-free threshold to £500,000 and cutting the very high top rates would have a headline cost of £3bn – but would only amount to about £500m in foregone revenue once all the wider economic benefits are taken into account. As public spending measures go, that would be a pretty cheap way of producing a lot of positive outcomes.

With the Budget less than a fortnight away, Rishi Sunak is probably getting sick of people sticking their oar in. There’s quite a head of steam building for him to at least extend the SDLT holiday to help people who have begun the moving process to get over the line. Arguably, though, a short extension simply moves the cliff edge slightly further ahead. 

Far better surely, with the economy facing so many problems, to bite the bullet and make this positive, growth-enhancing policy permanent. Let’s just hope the Chancellor finds time in the coming week to read our report and take on board its eminently sensible recommendations!

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John Ashmore is Editor of CapX.