Duncan Lawrie Online ▼

Posted on: 29 October 2015 by James Humphreys

The housing market has been a useful tool with which the Government has stimulated the wider economy. Using schemes like 'Help to Buy' the Government has been able to encourage house price growth, creating a wider 'wealth effect' that translates into stronger consumer confidence.

However, more recent initiatives have begun to slow down house price growth, while the long-term objective of enabling more people to own their own home appears to be as elusive as ever.
   

Stamp duty calls

The stamp duty changes announced in George Osborne's Autumn Statement last year have had a dramatic impact on the more expensive end of the housing market. The Chancellor abolished the old 'slab-sided' stamp duty system and replaced it with a new system of progressive tax bands that penalise buyers of property worth more than £1m.

The taxation cost for anyone buying a £2m property is now £153,750, which is a significant sum, particularly when added to other costs like estate agent and legal fees. Families looking to move up the property ladder will now need to apply for even larger mortgages to cover this extra cost.

This has created a degree of inertia in the housing market. People who were considering a move have become cautious, or are now considering a loft conversion or extension instead, which is likely to be considerably cheaper than moving if they just need a bit more space. Estate agents are already reporting falling values for family homes - and they're also telling us that the much expected return of confidence to the sector that had been expected after the election has failed to materialise.

The changes may have also been counterproductive for the Treasury, with stamp duty revenue down 26% in the first half of the year, probably due to a significant fall in deals involving properties worth over £2m.
   

Property ladder or slippery slope?

These developments may cause difficulties for the Government's emerging housing strategy, which is intended to enable more people to become owner occupiers.

Their new plan aims to reverse the UK's poor economic productivity record. It highlights the country's inability to build enough homes as something that harms productivity, and therefore long-term living standards, restricts labour market flexibility and prevents an increasing proportion of the population from owning their own home. However, in the absence of a dramatic increase in housebuilding, which is currently unlikely, the paralysis at the top of the market will prevent people from moving up the property ladder and freeing up availability at the bottom for first-time buyers.

These recent changes show that the UK has a long way to go to fix its housing problems and, while it is tempting to try and tax an area of the economy that has created great wealth, the unintended consequences may restrict housing availability further. In the meantime, the UK continues to move rapidly towards a more European residential property market with more renting and less owner occupation.


 

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