The autumn statement swings round again and perhaps because it’s the one before the next general election, it has even more drama than normal. One thing that the chancellor is promising to sort out is the odd way in which Stamp Duty works, by smoothing out the ‘stepped’ formula that means there is a massive jump in tax if you go £1 over each threshold. This is generally a good thing because the current system is ridiculous, however there ought to be questions over the chancellor’s priorities when he’s giving a tax cut to people that can afford to buy and sell homes but completely ignoring the poorest in society.
From a recent BBC article, “The statement revealed borrowing would be higher than forecast and unveiled an £800m stamp duty cut Mr Osborne said would benefit 98% of homebuyers“. It’s the £800m tax cut, in light of higher than expected borrowing and when most observers are predicting “Colossal spending cuts to come” that is of greatest concern because they indicate a chancellor who is intent on helping the middle and upper earners while excluding the worst off.
First off, let’s reiterate that the current stamp duty system is in error. We can see in the following graph from the government’s autumn statement report that for properties around the lowest threshold for stamp duty – £125,000 – there is a spike in house sales just below that threshold and a dip just after because house buyers do not want to suddenly pay £1,250 just because they have bought a house for £1 more than £125,000. It’s most obvious at the next threshold of £250,000.
In general, the new system where you will only pay tax on the value above the threshold (so if you bought a house for £125,001 you would only pay tax on £1) makes far more sense and ought to have been brought in a long time ago. But is it warranted to do so now when it will cost £800 million that could otherwise be better spent on reducing the impact of cuts to welfare?
Who is the government helping here? Well anyone that can afford to buy a house at £125,001 or £250,001 will no longer have to pay so much in stamp duty and will be able to offer a higher price for their dream home without fear of a sudden hike in tax. At the same time, people selling their home around those price brackets can expect to ask and get a little more because buyers can spend more without penalty. Those spikes on transactions just below the thresholds will spread out just above the thresholds.
That may please buyers and sellers alike in the immediate term but it will simply fuel the rampant house-price hike that has been hitting Britain and that had only just showed signs of slowing down in November. This will continue the trend of pulling the housing-ladder up and away from the young and the poor.
Right to bubble
That housing bubble is also being fuelled by the Chancellor’s ‘help to buy’ scheme that basically returns us to 95% mortgages that encourage higher offers on homes but also sees the ratio of household debt to income spiral out of control in a manner that led us to the recent mortgage-lending related global recession. These top-up loans are interest free for the first 5 years which is another cut to government finances that helps current home-owners but will be paid for by cuts to welfare for the worst off. That said, the recent crisis was related to sub-prime loans and there is nothing in any of these measures aimed at providing finance or assistance to the poor.
The ‘help to buy’ scheme provides buyers with 20% of the price of their house which they have to match with 5% from their own funds. With the average house-price being £186,941, that 5% deposit is £9,347 which won’t have been easy to save while wages have stagnated and the cost of living has skyrocketed over the last 5 years and reportedly 25% of children being pushed into poverty.
Average house prices are higher than median house prices so we’ll look at average wages which sit at £26,500 despite 4/5 new jobs being created in sectors where average wage is £16,640. Using a mortgage calculator to see how much someone on the average wage could borrow (take home pay £1,747.89 according to ListenToTaxman). For simplicity we take the highly unrealistic view that they have no debt or spending commitments whatsoever and see that the average person’s borrowing power is £74,200-111,300 which would rise to £98,933 – 148,400 if you include the government’s 20% top up and a personal cash deposit of £4,946 – £7,420. On the surface this may seem ok, but ultimately it shows that the average person cannot afford the average home and the chancellor is further inflating house prices out of their reach.
So what does the timing of this long overdue Stamp Duty change show about the chancellor’s priorities with regard to who should be helped and what government’s role should be? The Conservatives are clearly aiming for popularity in the run up to the next election. This change in stamp duty will help people buy and sell homes right now for higher prices and will make homeowners pleased because their property values will continue to rise and there are enough people in those brackets to keep the Conservatives in power. But it won’t do much to help the average person in the longer term and it will do absolutely nothing for the poorest except eat away at dwindling welfare funding, but the poorest are less likely to vote.
This could all be nit-picking if there were anything included in the statement for the poorest but instead: we see a continued increase in the personal allowance which sees earners on £99,000 get a bigger help than those on the minimum wage and again does nothing for the poorest; and a tax cut for the highest earners via an increase in the threshold for the highest tax bracket. All these tax breaks are mirrored by lower welfare spending, freezes on benefits and attacks on migrants.
So enjoy your expensive houses and your housing boom, but when it collapses again, watch out for the lack of safety net as the UK returns to 1930s levels of government spending.