We have reported previously about the effect the stamp duty has had on the housing crisis, deteriorating its already unstable condition as if it was a virus attacking an already sick patient. Earlier this week, the Telegraph reported comments made by Christian Ulbrich, global executive chief of property group Jones Lang LaSalle. He has criticized the tax, claiming that it heavily distorts the market and penalizes landlords and second homeowners, while simultaneously exacerbating the intrinsic issue; the lack of supply in the market. He also highlighted five ways in which stamp duty severely affects the property market. Let’s examine them.
Firstly, the stamp duty prevents new development in the sector. Ulbrich mentions that stamp duty prohibits the building of new houses, and limits prices, which in turn reduces the amount builders can sell their properties for and affects their profitability. In the long run, this will harm development, as it will reduce supply of new properties and reinforce the issues caused by a lack of available properties.
Secondly, it stops transactions at the bottom of the housing ladder, as the tax prevents first-time buyers from being able to purchase a property, and means that fewer people move at all stages of the housing market. Younger buyers have been hit the hardest, with the struggle it takes to save for a deposit, as well as needing to pay for the legal and administrative costs of moving house. On an average first time buy, a property worth £205,170, the buyer must pay stamp duty of £1,603. Even though stamp duty rates have not risen, housing prices have, which indicates that first-time buyers must pay more.
Thirdly, the stamp duty impedes elderly homeowners from downsizing. When wanting to move out of their home which is not too big for them to live in, the elderly generation have been put off by unattractive costs of doing so. This then has a domino effect on those on the lower rungs of the property ladder, as they do not have any properties to move in to, which drives up competition and makes it more difficult for these ones to find a suitable home. Also, most of these homes will be larger and more expensive, and the tax burden associated with buying them make it harder for them to be sold on, so this causes a block up in the housing market.
The stamp duty also impacts on related businesses, such as conveyancing solicitors, estate agents, removals firms, decorators and interior designers. These occupations rely on some of their income being pumped in from people who move house, but in 2016, Oxford Economics found that stamp duty cost the economy nearly £1 billion due to fewer people moving.
Lastly, the tax compounds house price volatility. Stamp duty affects house prices as well as demand, and when a 3% surcharge was introduced in April last year, some buyers were asking sellers to decrease asking prices of properties as they had to factor in the impact of the tax. A correction in the market could make matters worse, as homeowners would want to hang on, unwilling to sell in a falling market.
This breakdown of the effects of the stamp duty has shown how especially brutal it has been to the worsening housing crisis. As the property market struggles to recover from rising house prices, a lack of supply, and fewer first-time buyers coming onto the market, it is possible the government may need to rethink the stamp duty and make changes to improve the economy.