A bubble housing market with fewer homes being sold? Could the reason be Stamp Duty? A report in The Times highlighted that in the 1980’s, around 12% of all houses changed ownership every year. Last year the figure was just 4%. There are thought to be several reasons for this. More people are buying for an investment rather than to live in the home. Older people are living longer, meaning fewer of their homes are coming onto the market. The higher price of homes is also preventing people from trading up to a larger home as their families grow, with the government controlling both supply, via planning rules and high taxes and demand, bubbling up prices with schemes and subsidies such as Help to Buy.
But the main reason why many are staying put is the huge rise of the cost of stamp duty. In the 1980’s, no stamp duty was payable on homes that sold for less than £30,000 and only 1% was payable on everything else. Today, you pay nothing on homes under £125,000, but the rates increase until you are paying 4% on a £500,000 home and 5% on £1million property and that is on the total price, not just the proportion above each threshold. It could get worse in the future if nothing is done.
In teh UK a house worth £100,000 in 1985 (£150,000 in 1995) would cost about £525,000 today. In 1995, the stamp duty payable would have been just £1,500. If prices had gone up by general inflation since then (a lot less than they have) you would pay £2,442 stamp duty in today’s money. But even at today’s prices, at 1% you would still be paying only £5,250. But to buy the same house now, the stamp duty payable is £21,000. No small wonder people are not moving as often as they used to!
Stamp duty, is 3% on homes that sell for more than £250,000. Around 25% of homes sold in 2012 paid at least £7,500 3% in stamp duty. This proportion will increase as prices increase whilst the thresholds remain unchanged. A property firm is predicting that the ‘Help to Buy’ scheme will result in an extra £1bn in stamp duty tax revenues over the next four years.
The every increasing cost of stamp duty is actually contributing to a shortage of properties on the market and is therefore causing prices to rise even further.
The cost of moving home has soared by 70% in the last ten years, with buyers forced to find £9,000 to pay fees and tax alone. The Taxpayer’s Alliance claim 183,000 paid the 3% or more in stamp duty in 2013 with two thirds of all homebuyers now paying stamp duty.
The last time that stamp duty thresholds were raised was as long ago as 2006, with the 1% threshold increasing from £120,000 to £125,000, having previously been held at £60,000 from 1997-2005. Unlike the stamp duty rates which have doubled, the higher rate thresholds never been raised and have failed to keep pace with house prices. Had they done so, the 3% band would now start at £694,000 and the 4% band would start at £1,388,000, according to the house price data from the Nationwide.
Critics have called for stamp duty to be made marginal, the same as income tax, so that the percentage paid relates to the amount above each particular threshold, rather than on the whole amount.
If left unchanged, it is expected that the revenue raised by stamp duty will triple by 2020 to £14billion a year. Currently, the average rate of stamp duty paid by homebuyers nationally is 2.21% for each transaction. This average is expected to be 2.88% by 2019. In 2012-2013, residential stamp duty generated £4.9 billion for the Treasury.