Wednesday, January 18, 2017


BLOG 177


I keep reading in the press that Mr Osborne’s increases in SDLT have killed the housing market.

The latest is Simon Heffer in last week’s Sunday Telegraph who tells me that “Among George Osborne’s disasters as Chancellor was his ramping up of stamp duty to a level – 12% on properties over £1.5million – that has killed the London housing market and caused revenues to plunge”.  He exhorts Philip Hammond “to cut the tax in order to increase revenues”.

I hope that Mr Hammond ignores this suggestion.  It seems to be based on a number of fallacies.  Leaving aside that stamp duty is not imposed on property transactions and that Mr Heffer cannot apparently tell the difference between stamp duty and SDLT (although of course he is a journalist and has to write half a page every week for the Sunday Telegraph so perhaps does not have time to check such details), prices are determined by markets, not by taxes.

Of course if a person is prepared to pay £1.6million to acquire a house, the imposition of a 12% SDLT may well mean that he is prepared to pay only £1,428,571 so that the £171,429 SDLT brings his total cost to his target figure of £1.6million.

Accordingly an increase in SDLT might well cause house prices to fall, although personally I think it more likely that they will still increase but at a lower rate than before.  That may however depend on the greed of vendors who may be reluctant to sell at a lowered market price in the hope that the slowdown is temporary.

The 12% rate is not something introduced recently.  It has applied since 4 December 2014, which is now over two years ago.  So how far have London house prices in fact fallen in that period?  The House Prices Index indicates that London house prices have risen, not fallen, by 7.6% over the 12 months to November 2016.  This roughly reflects the average rise in all UK cities and exceeds the UK residential growth figures overall of 6.7% fairly comfortably.  Hometrack predict a 4% increase in city level prices in 2017, again not a fall at all.

HMRC’s own statistics do show that the number of UK residential property transactions has fallen over the six months to the end of November 2016 from 683,340 to 625,280, a reduction of around 8.5%, but the 2015 figure was itself significantly higher than the 2014 one and a better comparison may be that the six months 2016 sales falls midway between the comparable figures for 2013 and 2014.  They also show that the SDLT yield from residential property did fall from £7.5million in 2014/15 to £7.310million in 2015/16 but the latter figure is still well above the £6.450million yield in 2013/14 and indeed above that for every year from 2006/07 onwards.  The total value of residential property sales actually rose from £304.155million in 2014/15 to £321.530million in 2015/16.

None of these figures support Mr Heffer’s claim that revenues from SDLT have “plunged” since the 12% rate was introduced in December 2014.  On the contrary, the indications are that receipts have in fact increased.

Another interesting point is that Mr Heffer’s 12% applies to owner-occupation acquisitions.  Since 1 April 2016, the rate on second homes and most buy-to-let investment has been 15%.  This 3% addition was announced in November 2015.  The number of residential property transactions has been running at around 100,000 a month.  Unsurprisingly, this leapt to 171,370 in March 2016 due to bringing forward purchases planned for April and May, but the figure returned to the 100,000 level in June and remained at around that level up to November 2016, which is the latest figure available.  Accordingly even that surcharge does not seem to have actually had a long-term effect on sales.  Of course there may have been a shift from buy-to-let purchases to owner-occupier purchases, which is what the surcharge was partly intended to achieve, but as most property purchases are largely financed by mortgage and the owner-occupier has to pay his mortgage interest out of net income, whereas in most cases the buy-to-let investor has the advantage of paying it out of gross rental income, so receiving a substantial subsidy from the exchequer, that seems unlikely.  Suppose the annual interest on a £1.5million purchase is £80,000 p.a.  The owner-occupier needs to earn £133,333 to pay this (after tax of 40% and ignoring national insurance).  The cost to a landlord is £80,000, a saving of £53,333.  Accordingly one year’s tax saving on the interest far outweighs the one off extra £45,000 of SDLT.

It’s a long time since I studied A level economics, but my recollection is that market prices are a reflection of supply and demand. If supply increases and demand remains constant, prices will fall.  If supply decreases and demand remains constant, prices will rise.  In a property context, demand is largely fuelled by the availability of mortgages and the purchaser’s ability to borrow enough to meet the shortfall between the purchase price (including SDLT and other buying costs) and the purchaser’s own available cash.  The sub-prime mortgage debacle illustrated that where there is a ready available supply of mortgages, demand will increase substantially.  The controls that have been imposed on mortgage lending are accordingly far more likely to account for the slowdown (not plunge) in residential property prices than any increase in the one-off SDLT cost of the acquisition.



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