Stamping it out? Housing in the Budget

It’s that time of year when we all read the runes from the Treasury in an effort to anticipate what will be announced in the Budget next week. We know the government is acutely aware that nothing ranks more highly with the disaffected young voter than the question of housing. Small surprise, then, that many are predicting the Chancellor will announce at least a temporary reprieve from stamp duty for first time buyers on Wednesday next week. But would such a change really be the intergenerational boost it purports to be?

No-one outside the Treasury has much that is good to say about stamp duty (other than it is very easy to collect). But is it really a critical barrier stopping young people today from becoming home owners? Analysis of UK Finance figures suggests that more than a quarter of (mortgaged) first time buyers purchase properties below the £125,000 threshold, and therefore pay no stamp duty at all. In many parts of the country the tax is not a constraint on buying a first home in a significant way – so what does explain the falling ownership rates of young people?

Our work suggests that it is sluggish incomes, higher house prices and restricted credit which have created the real barriers to home ownership over time. In Figure 1, we track the number of years it has taken the median household headed by a young person to save for the upfront costs of buying a home. As this makes clear, exempting such households from stamp duty would do little to bring the prospect of their becoming home owners back in line with previous generations. The policy would save them just £772 in stamp duty today – a figure dwarfed by the median deposit of over £25,000 they have to find to turn their home-owning dream into reality.

That is not to say there aren’t some first time buyers for whom a stamp duty holiday would make a real cash difference. With the 2 per cent tax paid on homes costing £125,000-plus, and then levied at higher rates on slices of the price over £250,000, it is young people in parts of the country with high house prices who would benefit most from an exemption. So how would the average young Londoner fare? An exemption would save them £8,300 in stamp duty when they buy their first home – a considerable amount of money which could genuinely help some buyers. But as Figure 2 shows, when the length of time the average young household has to save for a deposit in London stands at 35 years, this is hardly a wholesale solution to the capital’s housing crisis (and a sensible cap on the maximum possible exemption could mute its impact even further).

In fact, the affordability effect of taking young people out of stamp duty may be even more attenuated than these charts suggest. A recent study shows that around 40 per cent of the benefit of exemptions accrues to the sellers who simply charge a higher price for their properties than otherwise. The Revenue’s own assessment  is even more damning: an evaluation of the 2010- 2012 stamp duty holiday found “the tax relief has not had a significant impact on improving affordability for first time buyers”. Rather than being the intergenerational leveller the government clearly hopes it will be, exempting first time buyers (average age: 30 years) from stamp duty could end up being a further boost to the wealth of existing home owners (average age: 56 years).

There are many good reasons to reform stamp duty, not least because it inhibits geographic mobility with downward effects on earnings. But with our best estimate suggesting that first time buyers paid between £1 billion and £1.5 billion in stamp duty to the Revenue last year, an exemption would be no small giveaway. When the affordability gains are this small, it is hard to conclude that this would be the best use of public money for a government wanting to help young people with housing. The same amount could fund more affordable homes; invest in infrastructure to unlock sites; or increase the capacity of local authorities to enable them to get building again.

Our verdict overall? The Chancellor is right to recognise the intergenerational fault-line that is housing; but a stamp duty holiday would do very little to bridge the gap, even in London and the South East.