The old stamp duty might have been the worst tax in the UK – and that’s saying something. So the changes announced yesterday that removed the old slab system and put in place a more progressive set of rates (George Osborne says 98% of people will benefit) have to be good news.
But will they really push up transactions as much as some commentators seem to think – or even save buyers much actual money?
At first glance my answer is no. That’s because house prices are driven by what buyers can afford to pay – so the less stamp duty they pay, the more they can pay the seller for the house itself.
As Capital Economics explains, a first-time buyer (FTB) with a total budget of £151,500 – made up of £150,000 for the home plus £1,500 for stamp duty – will now find they can afford a home for £151,000 plus £520 in stamp duty. But all the FTBs they are competing with will be in the same position, and pretty soon the price of that £150,000 home will be bid up to meet that added demand.
So the market will soon adjust itself upwards slightly, and the buyer will ultimately be no better off – instead, it will be the sellers who pocket the gains. This is why people often say that in practice it is the seller, not the buyer, who pays the stamp duty.
The net effect of the fall in stamp duty will be a small rise in house prices (around 1% on most estimates). In the long run, it is existing owners, not new buyers, who benefit. However, while it won’t save buyers money, the change might do something for transactions.
At the top end of the generational spectrum it might go a small way to persuading the retired to downsize: large stamp duty bills are off-putting for people needing to create income out of limited capital, so any cut here is a psychological boost.
And at the bottom end, the fact that part of the total cost of a house shifts from being tax to being purchase price makes a difference. That’s part psychological, too (tax paid is money lost) but there’s also something in the fact that stamp duty has to be paid in cash – it can’t usually be borrowed as part of your mortgage.
So this change – in the short term at least – should mean that first-time buyers don’t have to get their hands on quite as large an upfront lump sum for stamp and deposit as they did before.
It isn’t a huge effect, but I guess that when you are a chancellor doing all you can to keep the housing show on the road, every little helps.