Will the new stamp duty actually cost you more?

There is much to admire about the Treasury’s new way of calculating the stamp duty charged to people buying a home. For example, it gets rid of the distorting “slab” structure which was so frustrating to buyers and sellers of homes that were priced just over the threshold. We hope this change will bring a little bit more rationality into the housing market, by stopping the artificial bunching of prices just below the thresholds.

The new system should also help lower price pressure at the top of the market, because those buying more expensive properties will pay more than under the current system.

However we’re not convinced that this is a measure that’s going to make homes more affordable for families on normal incomes. And it seems that the government’s own Office for Budget Responsibility (OBR) feels the same way.

Using OBR analysis we calculate that buying a home currently worth £300,000 will cost almost £2,000 more to buy because of this stamp duty change.

Sounds odd? Let me explain.

The OBR produces an enormous ‘Economic and Fiscal Outlook’ for the government twice a year, which sets out how it expects the economy and public finances to perform into the future. As part of this, they calculate the impact they expect on the government’s books and the wider economy from new government policies.

When costing the new stamp duty system, the OBR estimated that: “for prices, the costing is based on a 1 percentage point change in the average SDLT rate leading to a 1.4 per cent change in the house price. The same elasticity is applied across the price distribution” (page 126).

What this means in non-jargon is that the government’s economists expect that the stamp duty change will make buying a home more expensive for the average buyer, because the lower stamp duty rate will cause house prices to rise by more than the reduction in stamp duty .

Based on this estimation by the OBR, we performed some analysis on the impact of the changes at different property values (see below). What this means is that while buying a new home will actually be more expensive for properties that cost less than £925,000, it will become less expensive for anyone buying a home for more than £925,000. The policy doesn’t seem quite so progressive now.

How does this make any sense when taxes are being cut?

Essentially, what the OBR and other economists are saying is that the extra money saved from paying stamp duty goes straight into the pockets of house sellers in the form of higher prices. In fact, the tax cut goes further and by creating more competition pushes prices even higher than the tax difference.

It’s a bit like a supermarket offering you “20% off”, but only after jacking up the price by 30%.

On top of all this, these changes come at a cost to the government too. The OBR have estimated the cost of the changes to be over £800 million per year, or almost £4.5 billion out to 2019-20, all of which will go straight into the pockets of property sellers.  We think these funds would be far better spent on investment in the affordable housing that is desperately needed.

There will of course be some winners. People selling houses under £1m will get higher prices for them, which could stimulate more sales with potential good consequences for the wider market (there’s some evidence of a link between transactions and house building). Equally, there’ll be a small group of people buying houses right now with the price agreed who might get a big tax break without seeing any change in the house price.

This doesn’t change the fact that getting rid of the ‘slab’ system is sensible – it’s just that it won’t improve affordability for hard pressed home buyers.

For first time buyers on normal incomes who dream of one day having a home of their own this isn’t the solution. Indeed, the OBR seems to believe that it will push that dream further out of reach. The only long term solution is to get us building enough new homes and dealing with our decades long failure to build the homes we need.

  1. I’m not sure this analysis is really right. For a start the buyers are getting a more valuable asset for only a little more money, and one day they will be sellers. Second most people buy with a mortgage and ‘affordability’ should take into account the initial payment required, which is lower under the new system.

  2. The timing of the stamp duty reform is very suspicious. Why could George Osborne not pass on the stamp duty reform benefits to those who already bought a house in tax year 2014/2015? At least he should have considered first time buyers let alone the ever greedy investors. Don’t you think Osborne has cheated on the existing home buyers big time ? Was this move only to gain political points over Miliband’s proposed Mansion Tax? There are many who could have saved thousands of pounds in stamp duty had Osborne worked on these reforms bit early rather than pushing it through now just because General elections are coming …. Thumbs down to George Osborne.

  3. This logic is completely flawed. The table showing the net impact of -£428 entirely ignores the fact that, unless you are a first time buyer, you will obviously be able to sell for more too. If someone was moving house from one £150k property to another the actual saving would be £972, in other words, almost 100% of the reduction in stamp duty paid. Also, even if you are a first time buyer you would benefit from reduced stamp duty NOW and the additional cost price would be paid over many years on their mortgage, thus meaning the ability to raise a deposit will be easier.

  4. You have to pay Stamp Duty within 30 days of buying a property. If you re using a solicitor to carry out the conveyancing, they will normally organise the payment for you.

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