Sunak: Putting his stamp on the housing market?
As the Covid-19 lockdown unwinds, the focus of the Chancellor of the Exchequer Rishi Sunak has turned to how best to encourage economic growth. Helping younger adults, widely recognised as more vulnerable to job losses when furlough ends, and a return to the Government’s levelling-up agenda will be important secondary objectives.
Housing market measures are expected to form a key plank of the announcements in Sunak’s 8 July Summer statement, and the idea of a temporary cut in stamp duty has been well trailed in advance.
Stamp duty has indeed been a favourite policy tool for Chancellors over recent years. Key changes have included the switch from a slab to a marginal rate regime (December 2014) and the introduction of a 3% higher rate duty on landlords and others buying additional properties (April 2016).
As Scotland and Wales have devolved powers to operate their own separate stamp duty regimes, the Chancellor only gets to determine Stamp Duty Land Tax (SDLT) for England and Northern Ireland.
But in both cases, a stimulus measure for first-time buyers already exists.
Introduced in November 2017, first-time buyer relief reduces the amount of SDLT payable by up to £5,000. No SDLT is payable where the purchase price is up to £300,000, and where it is above this threshold but no more than £500,000, the first-time buyer will only pay 5% on the amount above £300,000.
Even though strict criteria apply, about 220,000 households have qualified for SDLT relief in each of the last two financial years.
But, interestingly, these households are not distributed evenly across the country, but skewed towards London and the commuter towns of the South East and eastern England (see map).
Reflecting property price differentials, London and the South East account for the lion’s share (70%) of first-time buyers buying properties in the £300-500,000 band and so get the maximum £5,000 worth of SDLT relief. The combined value of first-time buyer relief obtained by households buying in London and the South East was almost £260 million in the 2018-19 financial year, just over half the total England figure.
Were the Chancellor to make the existing first-time buyer relief scheme more generous, there is a risk that he would be criticised for disproportionately benefitting those in southern England.
Not only might this sit awkwardly with the Government’s levelling-up agenda, but it may not be targeting help where it is needed most. One unfortunate consequence arising from the current economic uncertainty has been the withdrawal of high loan-to-value deals. Ironically, despite affordability pressures being the most intense in London and the South East, first-time buyers in those areas have been less adversely affected by this (because macro-prudential rules have limited their ability to leverage up their borrowing with high LTV Loans for several years). Put simply, they are not missing loans because in the main they couldn’t get them anyway.
If the Chancellor opts for a broader stimulus (one that is not targeted solely on first-time buyers), the associated annual cost would be much greater than the £½ billion associated with the first-time buyer relief scheme, possibly more than £3 billion if all transactions up to £500,000 were exempted. A still more generous scheme, would be one where the Chancellor exempted all buyers from paying stamp duty on the first £500,000 of any purchase (that is, relief on up to £15,000 of SDLT), but this looks politically infeasible as it would massively benefit the better off.
A more nuanced approach might be to combine SDLT cuts for first-time buyers or all home-owners with a targeted increase in the higher rate for additional properties. This would help to shift buying power from landlords and multiple home-owners to first-time buyers and those looking to move house and potentially at a lower net fiscal cost. Whatever the measures, the impact is likely to distort market activity and be felt differently across different parts of the country.