The rising tax burden for first-time buyers

Published as a Policy Exchange Research Note (with Ivan Costantino), 9 July 2007 (PDF)

Politicians have recently discovered a group whose concerns they are taking more seriously than they used to: first-time buyers. Following the house price boom of the past fifteen years, even flats and small starter homes have become so expensive that many young families are finding it increasingly difficult to make their first steps onto the property ladder. So-called ‘key workers’, low-paid employees within the public sector like nurses, fire-fighters and policemen, are also struggling to purchase the kinds of houses that their colleagues just a generation ago could have afforded. The property ladder has lost its bottom rungs.

Britain’s housing affordability crisis has a great deal to do with the unresponsiveness of supply. An increased demand for housing resulting from changing demographics, increased longevity and some international migration has not been accommodated because the British planning system has acted as a barrier against more development. In a series of reports, Policy Exchange has shown the consequences of this policy.

But apart from rising house prices, first-time buyers have also been hit hard by the burden of taxation and regulation that is associated with moving house. Buying a property has become more expensive in recent years thanks to increases in stamp duty rates and the fact that stamp duty varies with house prices. Obviously, this has been a very welcome development for the Chancellor of the Exchequer.

The total amount of stamp duty from residential property transactions only amounted to £675 million in 1997, a negligible quantity in the national government’s budget. By 2006 this figure had risen to £4.6 billion. In other words, there has been a massive tax increase for property transactions over the past decade. Two factors contributed to this development: house prices went up, but this increase was not accompanied by a commensurate change in stamp duty thresholds. First-time buyers are the most affected by rising house prices. In 1997 the average house price for first-time buyers was £43,654 and, therefore, below the £60,000 threshold for stamp duty at the 1% rate. By 2007, the average house price for first-time buyers had gone up to £145,801 and thus above the £125,000 threshold for stamp duty at the 1% rate.

So while it is welcome to hear politicians discussing measures to improve the situation of first-time buyers, it is the same politicians who have made life harder for them in the first place. House prices cannot be directly influenced by politicians, but the amount the government takes from first-time buyers through taxation can be controlled.

In this Research Note we will show how English first-time buyers have been affected by stamp duty in the past decade. In order to do this, we have collected data for the prices of typical starter homes for every single year and then calculated the pplicable stamp duty using the stamp duty rates which were in place at that time. Based on this data we assess how the situation of first-timers has developed. Unfortunately, we find that the stamp duty regime has aggravated Britain’s affordability crisis and made life harder for first-time buyers.

If the Government wants its actions to match its rhetoric, it should consider cutting stamp duty substantially or at least exempting first-time buyers from it. This would help young families for whom the aspiration to become homeowners has all too often become an unachievable goal.

Dr Oliver Marc Hartwich is a Research Director at Policy Exchange
Ivan Costantino is a Research Fellow at Policy Exchange

Press coverage (selection):

The Daily Telegraph, 9 July 2007: First-time buyers face £1,458 stamp duty bill

First-time buyers are paying an average of £1,458 in tax to get on the property ladder – up from near zero when Labour came to power. Research from the centre-Right think tank, Policy Exchange, shows increasing numbers of first-time buyers are having to pay stamp duty. In the week Prime Minister Gordon Brown is expected to outline plans to help first-time buyers, the research claims his tax regime as Chancellor exacerbated the problem. … Oliver Marc Hartwich, the chief economist at Policy Exchange, said: “It is a normal human aspiration to want to own your own home, but that is now all but impossible for a large number of young people. “The main reason is soaring house prices, but the Government has made it even more difficult for first-time buyers by presiding over a regime of rising stamp duty.”

The Guardian, 9 July 2007: Stamp duty ‘pricing first-time buyers out of market’

Gordon Brown was accused of pricing first-time buyers out of the property market after research out today showed that they faced an average stamp duty bill approaching £1,500. … Oliver Marc Hartwich, the thinktank’s chief economist, said: “Hundreds of thousands of first-time buyers now have to pay the government to get on the property ladder, whereas they wouldn’t have had to pay anything a decade ago.

The Daily Mirror, 9 July 2007: ‘Cut duty on first homes’

STAMP duty is pricing most first-time buyers out of the property market, claims research which shows they face an average “extra” bill of £1,500. … And PE top economist Oliver Marc Hartwich said: “The government cannot directly control prices but it does control stamp duty. “It should cut or abolish it for first timers so they can get on the ladder.”

Metro, 9 July 2007: First time buyers ‘priced out’

Gordon Brown has been accused of pricing first-time buyers out of the housing market after research showed they face an average stamp duty bill of nearly £1,500. When Labour came to power in 1997, the property tax was an issue only for those trying to get on to the housing ladder in Central London. Now the average bill has more than trebled from £722 to £2,433. Only buyers in the East Midlands and North are likely to find homes selling for less than £125,000 – the threshold at which stamp duty kicks in.

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