Stamp duty is feeding the growing bubble in London’s house prices
02-18-2014
by Cormac Hollingsworth
SUPPORTERS of financial transaction taxes (FTT), often known as Robin Hood taxes, claim that they can make markets safer. But a look at London’s frothy housing market makes this argument difficult to sustain. FTTs remove liquidity from markets, making bubbles more likely to form. And it looks like London house prices are booming thanks to a venerable FTT: stamp duty.
The EY ITEM club recently warned of bubble-like conditions in London prices, and there is little sign that demand is easing. According to the Council for Mortgage Lenders, total UK mortgage lending in December 2013 was 27 per cent higher than a year earlier.
It is usually Help To Buy that gets the blame for the recent sharp rise in London house prices, by lowering the deposit requirements for buyers and bringing them flooding into the market. But the capital is also the place where repayments on a Help To Buy-funded 95 per cent mortgage are the highest. As such, it’s not obvious that Help To Buy makes it easy to buy. At the very least, there is more going on here. Critically, the high rate of stamp duty is reducing supply.
Take a look at a borough like Wandsworth. If someone earning £50,000 per year – an income high enough to put them in the top quartile – wanted to trade up from their first property to an average-priced home (as measured by the Land Registry house price index), they would face a stamp duty payment equivalent to 40 per cent of their annual take-home pay. Where is that money going to come from?
And this is about to get worse. Average prices in Wandsworth are barely below the £500,000 threshold at which stamp duty rises from 3 to 4 per cent. The higher threshold will be reached within weeks, given the annual 18 per cent growth rate in prices. The situation in Southwark or Lambeth isn’t much better. It will only be a few months before average buyers earning £50,000 per year in those areas have to pay more than 50 per cent of their take-home pay in stamp duty.
As a large out-of-pocket expense, stamp duty has the effect of reducing supply in the market. There are fewer transactions going on than there would otherwise be, because existing home owners can’t afford to trade up and thus release supply for new buyers. Any equity owners have built up in their current home is needed to buy the next property up the ladder, so the stamp duty just stops them moving. Supporters of the FTT should take note.
The natural response would be to abolish stamp duty. But it will raise £8.4bn in 2014-15 according to the Office for Budget Responsibility, and there is little sign that the government is willing to give up this revenue. The most obvious solution is to lower the threshold for Help To Buy to £300,000. This will at least tackle the London property problem on the demand side for the short term; and buy the time to find new ways of boosting supply.
Cormac Hollingsworth is a research associate at the Social Market Foundation.