Stamp duty cut for first-time buyers will push up prices, warns OBR

One of the key measures in the chancellor’s drive to help young buyers get on to the property ladder could backfire by pushing up house prices, benefiting those who already own homes, the independent Office for Budget Responsibility has warned.

Philip Hammond announced the immediate abolition of stamp duty for all properties up to £300,000 bought by first-time buyers with immediate effect as part of a range of measures designed to address the UK’s housing crisis. The move will save four out of five first-time buyers up to £5,000.

Those spending up to £500,000 – including most buyers in London – will also benefit, as the first £300,000 of the purchase price will not be subject to the tax. Previously the tax was paid on all purchases over £125,000.

The Office for Budget Responsibility is the government’s independent forecaster, which gives its verdict on the outlook for growth and the public finances twice a year.

The forecasts are published to coincide with the chancellor’s two big set pieces of the year – the autumn budget and the spring statement – and takes into account the impact of any tax and spending measures announced in those statements.

The OBR also uses its public finances forecasts to judge the Treasury’s performance against the chancellor’s fiscal targets, stating whether or not it has a greater than 50% chance of hitting the targets under current policy.

It was established in 2010 by the then chancellor George Osborne with the aim of improving the credibility of the government’s official forecasts for growth. The forecasts were previously produced by the Treasury itself and often criticised for being unrealistic.

The OBR is led by three members of the budget responsibility committee, including chairman Robert Chote, a former director of the Institute for Fiscal Studies, with support from the OBR’s permanent staff of 27 civil servants.

However, the OBR said the tax break was likely to push property prices up by about 0.3%, with most of the increase coming in 2018.

“The main gainers from the policy,” said the forecasting group, “are people who already own property, not the FTBs [first-time buyers] themselves.”

It added that some potential FTBs, with smaller deposits, would now be able to borrow a little more “allowing them to buy properties that they otherwise could not afford – but more expensively”.

The stamp duty cut was among a raft of measures designed to provide more homes and reverse the recent decline in home ownership. They include:

• Local authorities being allowed to charge double council tax on empty homes.

• A total of £44bn of funding, loans and guarantees to boost the housing supply by 300,000 new homes a year by the mid-2020s, including £15.3bn of new money.

• A focus on development in city centres and around transport hubs with possible new rules on the minimum density of homes.

• A consultation on a new policy to encourage planning permission for schemes with a high number of homes for first-time buyers or affordable rent.

• A review into why there is a gap between the number of homes granted planning consent and the number actually built.

• A consultation on the barriers to landlords offering longer, more secure tenancies.
  

• Borrowing caps for local authorities will be lifted in expensive areas to allow them to build more homes.

The former head of the civil service, Lord Kerslake, described the measures as a “mixed bag” which would struggle to deliver the government’s ambition on new housing.

“I welcome the chancellor’s announcement of £15bn of new support for housing but it doesn’t reflect the government’s ambition to solve the housing crisis and, crucially, it’s unclear about how it will help ordinary people to find a truly affordable home,” he said.

Hammond had been under pressure to make changes to stamp duty, with critics of the tax claiming it has been causing problems for the housing market. First-time buyers need to save for longer as rising prices mean they need more money to cover their deposit as well as the tax, while families stay put and extend their homes rather than move and pay the charge.

The tax, which buyers pay when they complete on their purchase, generates substantial revenue for the Treasury. It brought more than £8bn into the government’s coffers in 2016, up from £4.2bn five years ago as a result of rising house prices and more property transactions.

The move, which will cost the Treasury an estimated £3.2bn over the next five years, will save the average first-time buyer £1,660.

The chancellor said he wanted “to take action today to help young people who are saving to own a home”, addressing the challenge for first-time buyers of finding the “cash required up front”.

This is not the first time a chancellor has suspended stamp duty on some purchases. In 2008, during the financial crisis, Labour’s then chancellor, Alistair Darling, temporarily increased the starting threshold for the tax from £125,000 to £175,000. Later he also introduced a payment holiday for first-time buyers.

The Chartered Institute of Taxation said a report by HMRC on that second change had shown that the majority of the tax saved had gone into higher house prices.

The new rules will affect first-time buyers in England, Wales – until April 2018 – and Northern Ireland. Research by estate agency HouseSimple suggested that in London 5.3% of homes on the market could now be bought tax-free, compared with 0.3% before the change.

First-time buyers will pay 5% on any part of their purchase between £300,000 and £500,000 – this means anyone spending £500,000 on a home will pay £10,000 in duty, £5,000 less than under the previous rules.

Citing a fall in the number of 25- to 34-year-olds owning a home from 59% to 38% over the past 13 years, Hammond said: “Put simply, successive governments over decades have failed to build enough homes to deliver the home-owning dream that this country has always been proud of.”

He reiterated a pledge to build 300,000 homes a year and announced extra money to support building, including £34m to develop construction skills and provide new workers for the building sector, and £8bn of guarantees for private housebuilders and developers in the build-to-rent sector. Last year just over 217,000 new homes were constructed.

Hammond also announced a consultation on the barriers to landlords offering longer tenancies to those who want them – currently many tenants are offered just 12-month contracts.

Dan Wilson Craw, director of the campaign group Generation Rent, said that without any detail on this policy “real improvements in renting still feel a long way off”.

Commenting on the stamp duty change, he said the real winners would be people with properties to sell: “In areas where first-time buyers are competing with investors for homes, no stamp duty to pay will give them more purchasing power,” he said. “But where they’re competing with each other it just means they have more cash with which to make an offer.”