Stamp duty is having a significant effect on the UK property market and over the course of a five year period, an additional 146,000 sales would have taken place if it had been removed.
House building is down around 50% since 1970 in part because the seller bears some of the tax burden, according to a new report carried out by the Centre for Economics and Business Research (Cebr), commissioned by Santander Mortgages.
It explains that property wealth is heavily skewed as those aged 55 and over own 63% with an average wealth of £161,000, while those aged 25 to 34 own least, with an average wealth of just £3,000.
The researchers have calculated that an extra146,000 property transactions would have taken place between 2012 and 2017 had movers not been paying stamp duty and says that the housing market needs to be more flexible to allow people to move easily and inexpensively.
It argues that stamp duty inhibits the incentive to relocate for profitable labour opportunities, reducing the ability to react to changes in economic conditions in different locations and that the incentive to build more property would have been higher as under the current system 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 million 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% while the number of households grew by 14%, with one or two person households, which make up the majority of UK households at 63%, growing at the fastest rate.
The report shows there are fundamental issues which have been exposed with this form of tax as 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.
‘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,’ said Miguel Sard, managing director of Mortgages at Santander UK.
‘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,’ he added.
Additionally, the report suggests that stamp duty reduces labour market flexibility as 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.
‘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,’ said Christian Jaccarini, Cebr economist.
‘In fact, we estimate that 146,000 more transactions would have taken place in the five 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 Budget,’ she added.