Rishi Sunak's stamp duty holiday is risky and expensive. Here are three housing measures he could have announced instead.
In his Summer Statement, the Chancellor Rishi Sunak announced about £30bn of additional support for the economy, adding to the already significant sums of money being spent by government during the coronavirus crisis.
Notable among the announcements was a stamp duty holiday costing £3.8bn – among the most expensive measures in the Statement. The policy will cost more than the Kickstart Scheme (£2.1bn) for hiring young workers at risk of unemployment, and other measures aimed at boosting work search, skills and apprenticeships (£1.6bn) combined.
The holiday will see stamp duty removed from house purchases up to £500,000 in value, between now and March 2021.
But does the stamp duty holiday make sense in the current economic crisis? Why has it been introduced? And did the Chancellor miss an opportunity to introduce other, more important, housing measures in the Summer Statement?
Stamp duty holiday is unlikely to provide a significant economic stimulus
Notably, the supporting documentation for the Summer Statement classifies the stamp duty holiday as a measure aimed at “creating jobs”. Will it achieve this apparent objective?
Theoretically, a temporary stamp duty reduction could create and support jobs via a number of channels:
- Increasing rates of housebuilding, and in turn supporting jobs in the construction sector, if property developers anticipate greater demand for homes as a result of the holiday.
- Supporting jobs in real estate services/estate agencies through greater housing transactions.
- Increased rates of home moving stimulating demand for services such as removals, decoration and renovation.
- Increased rates of home moving driving demand for durable goods such as furniture, supporting jobs in the retail sector.
- Money not spent on stamp duty being spent elsewhere in the wider economy.
- Encouraging people to move to areas with more job opportunities/stronger economies.
Yet, while these are plausible channels through which a stamp duty cut creates or supports jobs, there are compelling reasons to expect such benefits to be limited – especially given the temporary nature of the reduction.
A good place to look for evidence is the last economic downturn, the global financial crisis, when stamp duty was also cut temporarily. In September 2008, the then-Chancellor Alastair Darling increased the lower threshold for stamp duty liability from £125,000 to £175,000, lasting until September 2009. This was later extended until 31st December 2009.
Evidence on the economic impact of this stamp duty holiday is mixed. On the one hand it has been estimated that the policy increased housing transactions by 8%. However, this was rapidly reversed once the holiday ended – housing transactions fell sharply afterwards. Conceivably, the stamp duty holiday might have just brought forward house purchases that would have happened anyway – with little overall economic impact.
A separate evaluation of the stamp duty holiday in Wales concluded that the holiday “generated little additional activity in the Welsh economy”. The evaluation also noted that “following the withdrawal of the [stamp duty holiday], there was a substantial downturn in housing transactions throughout 2010. Approximately 90% of the additional activity in the market [was] due to buyers adjusting the timing of their planned property purchase to take advantage of the tax holiday”. There was also estimated to be limited stimulus associated with moving-related spending: “for every pound lost in tax revenue, additional household expenditure [was], approximately, £0.50”.
If a similar trend is seen in the current economic crisis, the Chancellor’s costly stamp duty holiday may do little more than postpone pain and job losses in sectors such as construction – casting doubt on the worthiness of this £4bn tax break.
Levelling-up?
To the extent that there are financial benefits, these are likely to be unevenly spread and disproportionately benefit those with relatively high levels of wealth. Despite accounting for 36% of all housing transactions under £500,000, London, the South East and the East of England account for over half (53%) of all stamp duty receipts from English homes below this price point.[1] When including homes above the £500,000 price point, these three regions account for 72% of all stamp duty receipts in England.[2]
This reflects the higher average price of homes in these regions. With the Government supposedly committed to “levelling up” the country, why has the wealthy South of England been handed a sizeable tax break, which is likely to have limited economic benefit?
Supporting renters would have been a better focus of policy
Renters stand to benefit very little, if anything, from the stamp duty cut. Yet they are probably most in-need of immediate housing intervention. As thousands fall into arrears, it is unclear why homeowners have been prioritised and renters neglected by the only Summer Statement policy offering housing-related financial support. Further, first time buyers were already exempt from paying the property tax on homes valued up to £300,000, meaning this policy will not provide much further support for many of those looking to rise out of the rented sector and onto the property ladder.
Renters make up a substantial proportion of the population – almost two in five UK households across both the privately and socially rented sectors. Over the last decade, the private rented sector has seen the biggest tenure growth, accounting for 20% of UK households (4.5 million families) by 2017, up from 13% in 2007. Looking back to the previous recession for housing policy ideas is therefore problematic given the significant changes to housing tenure since 2007; tinkering with property taxes for homeowners in 2020 does not support a growing, large proportion of the housing market.
Renting in the private sector can mean greater instability for tenants, relative to homeowners due to the threat of no-fault evictions. In the current crisis, no-fault evictions have been temporarily suspended until 23rd August – but, an additional 227,000 renters could face homelessness when the ban is lifted as a direct result of the pandemic.
The total number of renters that have fallen into arrears has doubled to 442,000 since the beginning of March. It’s likely that this will be exacerbated by a wave of further job and income losses as the Coronavirus Job Retention Scheme is wound down and replaced by the Job Retention Bonus. The Chancellor failed to address this likely risk in his support package.
The economic shock of coronavirus has been characterised by its disproportionate sectoral impact. The retail and hospitality sector have felt this most severely with nearly 3 million workers furloughed since March – the highest across all sectors.
SMF analysis graphed below shows that renters are more likely to be at risk of immediate income or job losses than their home-owning peers, due to a higher concentration of jobs in retail and hospitality. More than one in five (21.5%) private renters are employed in this broad industry category, compared to about 15% of homeowners (16.4% of those that own outright and 14.4% mortgage-holders). Private renters are also less likely to be employed in the public sector, where job security is set to be much greater in the short-term.
As incomes are reduced or lost, it is likely that many will need to claim housing benefits to meet rent payments. For those who have not claimed before and currently pay average market rent or above, the existing rate of support (30% of market rent) will not be enough for many, causing more private renters to fall into arrears.
For those who are more familiar with claiming housing benefits, any shocks to their income will be compounded on by the past decade of cuts and freezes. Research shows that at the beginning of March 2020, Local Housing Allowance rates (30%) had not been upheld in 97% of areas in England. Without intervention, many households will face further poverty, poor housing conditions and/or homelessness as a result of this crisis.
What the Chancellor should have done
1. Social housebuilding plan – “Homes for Heroes”
The Government could have, for example, spent the circa £4bn cost of the stamp duty holiday in ways that more directly supported housebuilding, particularly the construction of homes for those that most need it. The Summer Statement could have announced an ambitious plan to build more, high quality social housing – homes for the modestly-paid key workers in supermarkets and care homes – that kept society going during the lockdown.
Such a direct intervention in the housing market would be more likely to generate economic gains than a stamp duty holiday which risks just bringing forward transactions that would have happened anyway.
2. Supporting renters through protection from eviction and an increase in housing benefit
The Chancellor could also have announced more support for renters in the current crisis, especially given that renters are at greater risk of job and income losses over the remainder of 2020. Financial support for those in arrears, including measures to at least delay evictions, would have been welcomed.
An increase in Local Housing Allowance (‘housing benefit’) rates would have provided much-needed support to renters on modest incomes. George Osborne’s Summer 2015 Budget saw a freeze of working age benefits, including Local Housing Allowances, which only came to an end this April. At the time it was estimated that the freeze would lead to a £4bn reduction in the overall benefits bill in the 2020/21 fiscal year. For about the same money as the stamp duty holiday, the Chancellor could have bolstered the benefits of lower income households to what they would have been without the benefits freeze – at least temporarily.
With lower income households more likely to be running down savings and having to borrow more in the current economic downturn, an at least short-term benefits boost could have stopped wealth and income inequality rising as this crisis progresses.
3. Stop tinkering and instead abolish stamp duty *permanently*
We should emphasise that we are not opposed to stamp duty reforms – or even cuts to stamp duty. Indeed, stamp duty is widely regarded as an inefficient tax which creates unnecessary barriers to home-moving. This in turn reduces the geographical mobility of the workforce and leads to more inefficient use of property – for example by discouraging retired households from downsizing and freeing up larger homes for bigger families.
There are, in fact, compelling reasons to scrap stamp duty altogether and replace it with an annual tax on property. An annual property tax would create more stable government revenues than stamp duty receipts, which can vary drastically depending on the number of housing transactions taking place each year.
Rather than a temporary stamp duty holiday with limited economic benefits, the Chancellor could have used the Summer Statement to surprise us with a permanent abolition of this widely-loathed tax. That would have had more hope of supporting jobs.
[1] Authors’ calculations using HMRC stamp duty statistics
[2] While buyers of properties above this price point will still pay some stamp duty during the Chancellor’s holiday, this will be at a reduced rate due to no duty being applicable on the first £500,000 of value.