A new report carried out by the Centre for Economics and Business Research and commissioned by Santander Mortgages, has found that amongst other things, Stamp Duty Land Tax (Stamp Duty) is having a significant effect on the UK property market by impacting people who move more.
The report looks at the effect of Stamp Duty on the UK’s residential property market. Titled “An examination of residential Stamp Duty Land Tax”, the findings reveal that over the course of a five-year period2, an additional 146,000 property transactions would have taken place if Stamp Duty had been removed. It also argues that the incentive to build more property would have been higher as under Stamp Duty the seller bears some of the tax burden by selling at a lower price. This lessens profits and reduces the incentive to develop supply in cases where profitability is more marginal, fuelling the lack of housing in the UK.
The report highlights that as the UK undergoes demographic change its housing must adapt. There are currently 28.3 million3 households in the UK. This number has been growing at an average rate of 0.7 per cent every year over the past two decades.
In the 20 years to the end of 2015, the UK population grew by 12 per cent while the number of households grew by 14 per cent, with one or two person households, which make up the majority of UK households (63 per cent), growing at the fastest rate. Property wealth is also heavily skewed, with those aged over 55 owning 63 per cent of UK residential property.
The report shows there are fundamental issues which have been exposed with this form of tax – it discourages mutually beneficial transactions and therefore prevents an efficient allocation of housing stock between different sized households, from first time buyers to the elderly. It also dampens the growth of the UK’s housing stock, by making it less profitable for developers to build and sell the properties that are much needed to combat the housing shortage. House building has slowed in recent decades, from 327,000 per year in the 1970s to just 164,000 in the decade up to 2016.
Miguel Sard, Managing Director of Mortgages, Santander UK said: “The report highlights the unintended consequences of Stamp Duty. First time buyers struggle to get on the ladder, young families want to move up it and the elderly want to downsize, but all are stifled by Stamp Duty.
Those aged between 65 and 74 have the greatest average property wealth in this country, and youths have the least. The housing market needs to allow for adjustments in demographics to be mirrored by the supply of accommodation.”
Additionally, the report states that Stamp Duty reduces labour market flexibility – people need to be able to move home easily and inexpensively so they can live near work or move for family reasons such as schooling. Stamp Duty in its current form does not reflect the way UK residents live as it reduces the incentive for people to take on profitable labour market opportunities. In turn, this could reduce the ability of the UK economy to react to gradual or sudden changes in economic conditions in different geographies.
Christian Jaccarini, Economist at the Centre for Economics and Business Research, commented: “While the under-supply of housing has rightly received much attention, our research shows that Stamp Duty significantly impedes housing transactions, meaning that we don’t maximise the benefit from the existing housing stock. In fact, we estimate that 146,000 more transactions would have taken place in the 5 years to June 2017 if Stamp Duty was removed entirely. The Chancellor should seize this opportunity and make Stamp Duty reform a priority at the upcoming Autumn Budget.”