Sunak’s stamp duty cut was a mistake, economists say

·4-min read
Sunak’s stamp duty cut was a mistake, economists say

The stamp duty cut, the chancellor’s effort to boost pandemic-hit property transactions, likely did more harm than good for buyers, economists believe.

The stamp duty holiday for properties worth more than £500,000, which the Treasury introduced to try and cushion the property market from the impact of the pandemic, ended in June and has fuelled a surge in house prices. At the end of September, the threshold for the tax holiday will drop further, from £250,000 to its pre-pandemic level of £125,000.

Yet while the tax break boosted the number of house sales, analysts and economists told The Independent any saving for buyers was mostly eaten up by house price rises, which were pushed higher by the tax cut. UK average house prices increased by 10 per cent over the year to May 2021, and 9.7 per cent in England, according to the latest data from the Office for National Statistics. That meant the average UK property cost £255,000 in May 2021, £23,000 higher than in May 2020.

Meanwhile, the purchase of a house worth £232,000 – the average price for England in May 2020, before the stamp duty cut was introduced – would have incurred a stamp duty bill of around £2,000, according to an online calculator from MoneySavingExpert. Though the tax holiday is not the only reason house prices have risen, buyers of average-priced homes will not have felt much benefit from the tax break, and will face much higher prices once it ends.

The tax holiday was controversial at the time, and it has joined with a host of other forces to cause a sharp rise in house prices. These include broader inflation pressures, ultra-low interest rates, and quantitative easing from the Bank of England, which is meant to keep money flowing through the economy but can inflate asset prices.

In June, the then chief economist at the Bank of England Andy Haldane said the residential housing market was “on fire” and that this had fed pre-existing housing inequalities, increasing the gap between incomes and house prices.

“If you asked the chancellor if he could go through it again, he wouldn’t have done the stamp duty cut, because we have got a surge in housing demand anyway. This added a spike up and a spike down, at the end, that probably wasn’t needed,” says Andrew Burrell, chief property economist at Capital Economics. “You’d have still had strong house prices.”

Some economists, including Yael Selfin, chief economist at KPMG, warned that when the stamp duty cut was introduced, it would just drive up an already fairly buoyant market. She said in 2020 that “sellers may absorb some, or all, of the stamp duty cut by raising [their] asking price”.

Ms Selfin says the cut meant a boost in transactions but also a loss in tax revenue for the Treasury, even as it warned about the need to rebalance the public finances.

“It definitely didn’t benefit government revenue; it hasn’t really benefited the buyers,” she says. “We do need to rethink stamp duty more broadly, but [this was] maybe not the thing we needed.”

Think tanks across the political spectrum have called for the tax to be scrapped as they believe it favours wealthier people and discourages others from moving. They suggest it should be replaced with an annual levy tax that’s tied to the value of a property.

Last month, UK residential transactions reached 198,240 – 219.1 per cent higher than the same month in 2020, and 74.1 per cent higher than in May 2021 – according to HMRC data, which estimates and seasonally adjusts the number of domestic property deals.

But there are signs that the market may have cooled slightly. House prices fell by 0.5 per cent in July, according to an index compiled by the Nationwide Building Society. However, this could prove temporary, as middle and higher earners have collectively saved billions during the pandemic. As people adjust to working from home more regularly they could be drawn to larger homes, Ms Selfin notes.

Prices are therefore likely to climb further in the coming months, even after the stamp duty holidays end, and particularly outside London, says Tom Bill, head of UK residential research at property agent Knight Frank.

Mr Bill predicts that there will be a 20 per cent increase in average house prices over the next five years. He expects the “race for space” and “escape to the country” trends driven by lockdowns and home working will continue, as London was already proving unaffordable for many buyers before Covid-19 restrictions.

“We’re picking up where we left off pre-pandemic,” says Mr Bill. “There’s going to be more of an affordability squeeze. It’s an issue within London – with people being pushed towards the east and southeast – and beyond, where people are being pushed to secondary cities.”

A Treasury spokesperson said: “The temporary stamp duty cut is helping to protect hundreds of thousands of jobs which rely on the property market, by stimulating house moves.”

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