Housing market experienced a sudden boost due to reduced stamp duty - anticipating a subsequent drop, according to HELEN CRANE's observations
Frenzy in the Housing Market: The Impact of Stamp Duty
March saw a housing market frenzy as homebuyers raced against time to secure their purchases before stamp duty hikes on April 1. The mad dash resulted in a whopping 104% increase in property transactions compared to the previous year, according to HMRC's figures. With this surge comes the looming anticipation of a slump as demand wanes, much like the Market's previous peaks in March, June, and September 2021.
In fact, Nationwide reported a 0.6% drop in house prices in April. The see-sawing market pattern has been triggered by the Government's attempts to stimulate the market with stamp duty cuts during the pandemic.
The Case Against Stamp Duty
Although no tax is universally loved, the arguments against high stamp duty are compelling.
- Encouraging mobility: People should have the freedom to move house when they need to, helping boost the economy as builders gain confidence in selling their homes. This, in turn, benefits a vast array of businesses relying on house-related activities – from decorators to furniture shops and bubble wrap manufacturers.
- Promoting affordability: A stamp duty cut can make the difference for families on a tight budget, especially in the United Kingdom's unaffordable housing market.
- First-time buyers' struggle: High mortgage rates and the average first-time buyer's age (32) contributes to the hardships faced by first-time buyers. Since they're already stretching their budgets to save a deposit, higher stamp duty can seem insurmountable.
Abolishing stamp duty for first-time buyers would be a good move for a Labour government focused on generating 1.5 million new homes. However, it's essential to remember that eliminating the tax could also discourage downsizers – an essential component of a healthy housing market.
Politicians are hesitant to remove stamp duty as it may appear as tax cuts for middle-class city-dwellers on pricier properties. In 2023-24, Londoners accounted for 39% of all stamp duty payments.
But while house prices have spiked, stamp duty thresholds have remained unchanged since 2014. This means that buyers of average-priced homes across the country are increasingly finding themselves succumbing to the tax.
A decade ago, an average home buyer would have shelled out £1,380. Today, the same purchaser would pay £3,537 – a 156% increase, despite the home's price only edging up to £1,984,000 from £1,94,000.
The U.K. also collects more stamp duty than other nations. Buyers in France and Italy are charged 5.8% and 2%, respectively, compared to the U.K.'s 5%-12% tax on certain sections of the property's value. In the U.S., buyers pay nothing.
Finally, it's worth noting that, since stamp duty is paid by the buyer but based on the newly acquired home's value, it functions as a tax on the previous owner's gains.
Stamp Duty's Financial Impact
Despite calls for reform, the Government is slow to act due to the substantial revenue generated from stamp duty. In 2023-24, the Treasury pocketed £14.8 billion from stamp taxes in England and Northern Ireland. By 2029-30, this figure is expected to reach £26.5 billion, largely due to increased housebuilding and rising house prices (Office for Budget Responsibility estimate).
Yet, the true effect of these changes on government revenue remains unclear, and ongoing discussions seek to find ways of striking a balance between homebuyer needs and government fiscal goals.
- The unfaltering resistance against high stamp duty lies in its ability to hinder people's mobility, slowing the economy as it deters home transactions and impacts various businesses such as decorators, furniture shops, and bubble wrap manufacturers.
- A reduction in stamp duty could enhance affordability, particularly in the United Kingdom's expensive housing market, helping families on a budget secure their dream homes.
- First-time buyers, who face challenges with high mortgage rates and an average age of 32, find it difficult to navigate the current system with its high stamp duty, making it seem almost impossible to save a deposit.
- Eliminating stamp duty for first-time buyers could encourage more housing developments under a Labour government aiming to create 1.5 million new homes, although it may discourage downsizers who are crucial in maintaining a balanced housing market.
- Politicians tend to resist removing stamp duty, fearing it may be perceived as tax cuts for middle-class city-dwellers with pricier properties, with Londoners accounting for 39% of all stamp duty payments in 2023-24.
- As house prices continue to rise, it is worth considering that buyers across the country are increasingly burdened by stamp duty, with the same purchaser today paying £3,537 compared to £1,380 a decade ago, despite the home's price only increasing slightly, as stamp duty thresholds remain unchanged since 2014.
