18 August 2019

Sajid Javid is right – tinkering with stamp duty will not solve the housing crisis

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Newspaper headlines over the weekend had suggested that the new Chancellor, Sajid Javid, was planning to switch the liability for stamp duty from house buyers to sellers. Thankfully, Javid has now quashed this story in no uncertain terms. At most, this switch might have provided some help to liquidity in a few cases, but it would be unlikely to deliver the benefits some hope, and could just have distorted the market further. But we still need much bolder measures to tackle the housing crisis.

Let’s start with why Javid was right not to support this switch. Currently, the purchaser of a residential property in England or Northern Ireland is liable for Stamp Duty Land Tax (SDLT), with first-time buyers treated more favourably. However, the people who ultimately bear the economic burden of a tax can be different from those on whom it is initially imposed. This is not widely understood, regrettably, in the case of corporate taxes. But most can see that the costs of indirect taxes, such as VAT, are usually passed on to consumers.

In this case, the cost of stamp duty is reflected in the price paid for a property, and the burden is therefore already shared between buyers and sellers. The proportions will vary, depending on the state of the market and the relative bargaining power of the two parties. For example, it has been estimated that the stamp duty holiday in 2008–09 saved buyers and sellers an average of about £1,500, with £900 (or 60%) of the benefits going to buyers in the form of lower prices. But, crucially, whether it is the buyer or the seller that is formally liable for the tax is relatively unimportant.

So, would there have been any merits in changing this? There are two main arguments in favour of switching liability, both based on the idea that the seller is typically in a better financial position than the buyer.

First, the purchaser of a property is more likely to be short of cash, especially if they are a first-time buyer. The stamp duty bill can, of course, be substantial, and comes on top of all the other upfront costs of moving. It is also not usually possible to add stamp duty to a mortgage. In contrast, the seller should be able to pay the tax out of the proceeds, which might include significant equity.

However, the fundamental point remains: the seller will still want to charge a higher price to recoup the cost of the tax. Some have argued that the higher purchase price might then make it easier for buyers to get a larger mortgage, thus spreading the cost of stamp duty over the life of the loan. But this assumes that lenders are willing to lend more on this basis.

In reality, the lenders, and their regulators, would have to be satisfied that a particular purchaser is not a higher risk, despite having to service a larger mortgage from the same income. That might be bigger challenge for a first-time buyer with a shorter credit history. Lenders may also be less willing to rely on an increase in property prices which is only due to a change in the tax regime, and therefore reduce their loan-to-value ratios.

Second, it has been argued that switching the liability for stamp duty would be fairer and more progressive. The Association of Accounting Technicians (AAT) made this argument particularly strongly. In principle, this switch would mean that first-time buyers would never have to pay tax on their initial purchase, doing away with the need for any other special treatment. Then, as people move up the ladder, they will pay tax on the lower-priced property they are selling rather than the higher-priced property they are buying.

It has also been suggested by others that we should not have too much sympathy for those looking to downsize. They represent a relatively small proportion of the market, and are typically older people with plenty of equity who are therefore better placed to pay more tax than younger families.

Unfortunately, doesn’t this all sound too good to be true? We’re back to the fundamental point again. The same amount of stamp duty would still be due, just from the seller not the buyer. The first-time buyer might no longer have to pay directly, but the person selling to them will. Won’t they just raise the price to reflect this? The basic laws of economics are likely to trump any issues of inter-generational fairness.

Politically, switching the liability for stamp duty to sellers would be risky too. It could be seen as the introduction of a capital gains tax on main residences ‘by the back door’. Rightly or wrongly, people who have paid stamp duty when buying their home would worry about paying it again when they sell, and cry ‘double taxation!’. The additional uncertainly could simply dampen the market further.

It’s also hard to see how this tinkering would have fitted into a bold agenda of lowering and simplifying taxes – something the new Chancellor has acknowledged. A far better strategy would be to reduce stamp duty or eliminate it completely, tidy up the system further by getting rid of subsidies for first-time buyers, and, above all, tackle the housing crisis at source by allowing more homes to be built.

We might fall out over cricket, but the folly of stamp duty is one thing on which we and the Aussies can generally agree. Like other transactions taxes, stamp duty is a large deadweight on economic activity. There is no good reason why the tax paid over the life of a house should depend on how often it is bought or sold. Stamp duty discourages people from moving, which hurts the economy in many ways. The stock of housing is used less efficiently: it’s harder for people to trade up or own, or move to a new area for work.

While he’s at it, the new Chancellor should look again at the raft of subsidies for first-time buyers, which are bureaucratic and often counter-productive. This is also something on which there is widespread agreement. As the housing charity Shelter has put it, these short-sighted gimmicks have ‘helped a small number of people to buy, at the expense of worsening the overall affordability crisis for everyone else’.

Above all, none of this is getting to the root of the housing crisis, which is that not enough homes are being built. Ironically, the same edition of The Times which ran the interview with the Chancellor, also included a story (on page 2) about planning delays. Only a third of applications are being approved within the statutory limit of thirteen weeks, which just isn’t good enough.

To conclude, I recommend the liberating proposals summarised in ‘Raising the Roof’, by Jacob Rees-Mogg and Radomir Tylecote, published by my friends at the IEA. These proposals, which include meaningful cuts in stamp duty and a fundamental review of the planning system, are just the sort of the bold measures required. I hope it’s on the new Chancellor’s summer reading list.

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Julian Jessop is an independent economist.