Merryn's Blog

The core aim of UK economic policy – to stop house prices from falling

It's irrational and wrong, but Britain's economic policy is almost entirely aimed at stopping house prices from falling.

Wondering where your government's priorities lie? Then consider the interim report out from the Office of Tax Simplification on how they might go about changing the hundreds of tax reliefs on offer at the moment.

Some are listed as "potentially retain", others as "potentially simplify" and more as "potentially abolish". Look under the first category, and the two that jump out are a) income tax relief for players in the UEFA Champions League Final 2011 and b) capital gains tax relief on disposal of private residence.

The first of these is beyond me I can't understand why footballers should be exempt from taxes that other sports people have to pay. But the second is equally baffling, to me at least.

I've written here before about how I think primary homes should be taxed. If we take as a base view that it would be a good thing for house prices to remain relatively stable in real terms (to make sure that speculative money flowed into more productive investment) it surely makes sense to tax gains on houses rather than, as we do now, the transaction costs of buying and selling them.

The latter hurts mobility by making it impossible for most people to move house unless house prices are rising fast (which isn't good) while the former would dampen house prices without hurting anyone. You'd only pay tax on any gains you made above inflation, which in a rational market, would mean you wouldn't pay any.

However, as much as most of us would like to see flat house prices, the authorities would not. The OTS notes that were the capital gains tax relief on houses to be removed, prices would flatten. But in a hint as to how the authorities feel about that, they don't use the word flatten. They say "stagnate" instead.

Today's economic policy is almost entirely aimed at stopping house prices from falling if it wasn't, having the RPI at nearly 5% would have prompted a rate rise by now. So the fact that there isn't going to be a change to the way in which houses are taxed isn't a surprise. However that doesn't mean it isn't a mistake.

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