How the stamp duty holiday is pushing up house prices

Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb.

An irritated tweet from a reader. He lives in Scotland, had just bought a house and, thanks to Scotland not slashing stamp duty on house purchases in the same way as England had (no tax is payable on purchases up to a price of £500,000 in England vs £250,000 in Scotland), he said, just paid tens of thousands more to get his house than he would have had he been in the UK. I can see how that would be totally maddening.

But here’s the question – had he really paid more than he would have in the rest of the UK? I suspect not. Because, in the end, houses sell for as much as buyers are able to pay – and if they aren’t paying stamp duty, they can pay more in total for the house itself.

It might be buyers that have to actually hand over the stamp duty cash to the state, but it is the seller who tends to be affected by its level. When stamp duty goes up they sell for less; when stamp duty goes down they sell for more. This is not an exact science, but it is not hard to see in the numbers either.

The stamp duty cut came into effect in July. By the second week of August, the papers were reporting exactly what you would have expected: there was, as The Times put it, a “surge in the number of homebuyers, leading to bidding wars and the number of homes being sold over the asking price reaching record levels.”

There was a 45% rise in first-time buyers, and various estate agencies reported inquiries up by 30%-40%. The number of buy to let investors looking rose by 28% and of second home buyers by 22%.

You can see this same kind of dynamic working in the Help to Buy scheme as well. State attempts to subsidise the house purchases of the young simply push up the total amount they are able to pay – and do pay. Most research suggests that Help to Buy purchasers end up paying 5% to 8% more than ordinary buyers of new-build houses, something that has long allowed builders to keep their prices up while maintaining their glorious record of delivering generally shoddy products. Nice.

I think stamp duty is an awful tax. It gums up the housing market, it penalises those without well-off parents (if you need to pay a deposit and your stamp in cash saved out of earned income, you have an awful lot of saving to do); and it should be replaced by CGT on primary homes. But that doesn’t mean removing it will always make the final price of a house cheaper than keeping it.

Recommended

What are the best ways of raising more money in tax?
Economy

What are the best ways of raising more money in tax?

Given that whoever wins next week's election will be going on a massive spending spree, we're going to need to raise at least some of that money throu…
5 Dec 2019
What are the biggest mistakes investors make when it comes to tax?
Investment strategy

What are the biggest mistakes investors make when it comes to tax?

The tax implications of an investment are something we rarely consider until after the event. That could prove to be an expensive mistake, says Domini…
27 Nov 2019
10 ways to improve your home and interiors
Advertisement Feature

10 ways to improve your home and interiors

From shepherd huts, to pool tables, smart technology to high-tech security, here are some great ideas for home improvements
26 Oct 2020
Why house deposits and pensions don’t mix
Pensions

Why house deposits and pensions don’t mix

First-time buyers should not be able to raid their pension savings to pay for a house deposit.
26 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Don’t miss this bus: take a bet on National Express
Trading

Don’t miss this bus: take a bet on National Express

Bus operator National Express is cheap, robust and ideally placed to ride the recovery. Matthew Partridge explains how traders can play it.
19 Oct 2020
Last chance to secure a Bounce Back loan for your small business
Small business

Last chance to secure a Bounce Back loan for your small business

The government’s Bounce Back loan scheme will only run for another six weeks. Act now if you need to take advantage of it.
16 Oct 2020