3% Stamp Duty rate at £250,001 has devastating effects:
• 930% more transactions occur just beneath the 3% Stamp Duty threshold than above it
• 9,721 homeowners a year unable to sell because of threshold
• They may have to wait 2.5 years to get a fair price for their property
• Additional 13,866 forced to sell their property at up to a £10,000 price discount
• At least 50,000 households will face a £7,500 Stamp Duty tax bill in the next five years
• 73% of market sit in precarious price band between £125,000 and £250,000
• Every time Stamp Duty % rate is increased, spike in sales under £250,001 gets higher
It has been widely reported that a capital gains tax on foreign and non-resident investors is high on the agenda. Whilst the current exemption represents an inequality with domestic buyers, it is also a tax incentive which helps boost the UK economy to the tune of £1.2bn p.a. Political statements that this tax, which will target buyers of the most expensive homes, will ease the UK’s housing shortage are populist pleasers which distract from real solutions.
As Funding for Lending on residential mortgages bites the dust, the Government must try harder to understand the dynamics of the market place. Rather than providing artificial stimuli, they should look at basic economics to help free up the housing stock.
Stamp Duty goes up from 1% to 3% at £250,001, unchanged for nearly 15 years despite average house prices increasing over three-fold from £79,242 to £257,728 (in Q3 2013). 73% of the market now sit in the precarious price band between £125,000 and £250,000.
A new report, commissioned from Cass Business School by London Central Portfolio (LCP), has produced groundbreaking new findings on the detrimental impact of this threshold far in excess of the actual tax itself. The report will be released in full over the coming weeks but with the Autumn Statement approaching, LCP have fast tracked the release of some key findings.
There is a profound spike in transactions just under the 3% stamp duty rise at £250,001. 930% more transactions take place between £240,000 and £250,000 than between £250,000 and £260,000, at which point transactions begin to resume a normal pattern. This is based on Land Registry’s Price Paid Data, which records every sale that transacted in England and Wales (less probate sales, company transfers and repossessions).
This research demonstrates that in the absence of a tax hike, only 5,777 transactions would have occurred at the £250,000 price point during 2012. However, the distortion caused by the increased Stamp Duty rate led 19,643 sellers to duck under the ceiling last year to effect a sale, 3.5 times more than would be expected. A further 9,721 properties are estimated to have not sold at all, made up of buyers who could not afford to take such a heavy price discount. Almost 25,000 people last year were adversely affected at the expense of the Exchequers balance sheet. All of which could have been avoided by a ‘soft’ introduction of higher taxes.
Since the introduction of Stamp Duty at £250,001 in 1997, the research uncovers a consistent price suppression between £250,000 and £260,000, before a property becomes ‘saleable’ at its genuine market value. The flat-lining of cumulative transactions in England and Wales in 2012, between these two price points, clearly demonstrates this.
Analysis of Prime Central London, whose average price crossed the £250,000 threshold shortly after stepped Stamp Duty bands were first introduced, gives the most insightful snap-shot of the punitive nature of this tax. Each time the tax rate at £250,001 increased; from 0% to 2% in 1997, from 2% to 2.5% in 1999 and then to 3% in 2000, the spike in sales under £250,001 became more and more pronounced.
So what does this dynamic mean for hard-up UK homeowners? LCP’s forecasts show that, on current growth levels, 52,654 more households will reach £250,000 over the next five years. When they decide to sell, they will be faced with a very tough decision, the ‘Stamp Duty Dilemma’. To sell at up to a £10,000 discount? Or not to sell at all? The first course of action means the homeowner may simply be treading water when they buy a new property as they are unable to trade up. The second course of action is inaction. Either way, the doors remain firmly closed to first time buyers.
For those who are forced to sit and wait until their property reaches its true market value, this would be an achingly slow 2.5 years on average. Another blow to ‘Generation Rent’ as they hunt for available stock to buy at entry price level.
The Government need to grasp the mettle and reduce the tax hike at £250,001. Whilst it will have a cost to the Exchequer, it will be a drop in the ocean compared with the stimulus packages already introduced. The long term impact for these packages is unknown and probably dangerous, whilst reducing the Stamp Duty rate is guaranteed to make a difference for good, for second steppers and first time buyers.
