The government is no longer just revving the engine – it’s also cutting the brakes
Boosting the housing market has been central to the coalition’s efforts to stimulate economic recovery. As such, the housing market now occupies a similar position in the post-crisis growth model that it occupied in the pre-crisis growth model. Rising property values are compensating for stagnating earnings in fuelling consumer spending, partly because some households are able to withdraw their equity gains in order consume more, and partly because rising prices makes home-owners in general feel richer.
Of course, in a spluttering economy it is difficult to maintain house price growth at a pace that induces consumer confidence (this is, in part, precisely because earnings have been so flat – they remain well below their pre-crisis level in real terms). This helps to explain the continuation of ultra-low interest rates, with the Bank of England keeping rates at rock bottom despite the unemployment target at the heart of governor Mark Carney’s supposed ‘forward guidance’ having been reached at least two years ahead of schedule.
This dilemma is also, even more directly, the reasoning behind the coalition’s ‘Help to Buy’ scheme, introduced in 2013. The scheme is cloaked in progressive language, as a way of extending home-ownership to a wider group of people. But this position is hard to sustain when the mortgage-guarantee element of the scheme applies to any home valued under £600,000 – more than triple the average house price in the UK.
In its first year, ‘Help to Buy’ was used in around 90,000 home purchases. We can see from HMRC property transaction statistics that this represents around 7-10 per cent of residential property transactions (it is hard to be precise because the reporting periods do not match up). This would be an incredible act of interventionism for any government – let alone one committed to reducing public spending to 1930s levels.
There are many reasons not to build a growth model upon the housing market, not least because it makes growth too dependent on household debt. In the case of Britain, it also means severe regional inequalities are reproduced. The latest SPERI British Political Economy Brief, ‘The UK Housing Market and Stamp Duty Reform’, shows that average house prices are now more than 30 per cent above their pre-crisis peak in inner London, more than 15 per cent above in outer London, and almost 9 per cent above in the rest of the South East.
In contrast, average house prices in the three regions of Northern England remain 5-10 per cent below their pre-crisis peak.
It would be wrong to attribute burgeoning inequality directly to ‘Help to Buy’, given that only around 6 per cent of ‘Help to Buy’ transactions take place in London. Arguably, inequality would have grown even more without the scheme.
But this only serves to underline just how lopsided the regional distribution of property wealth in Britain has become. Boosting the housing market may have some short-term benefit in all parts of the country, not just London, but it undoubtedly reinforces a growth model within which London will always enjoy a privileged status. ‘Help to Buy’ is solving a problem that does not exist, given that houses have become more affordable for low earners in most parts of Britain since the financial crisis.
George Osborne’s decision, at his Autumn Statement in December 2014, to reform (and significantly reduce) stamp duty on houses purchases exemplifies this dynamic. Under the previous system, people buying a house costing between £125,000 and £250,000 paid 1 per cent of the cost in stamp duty. There was then a significant ‘cliff edge’, with a 3 per cent rate applied to houses costing between £250,000 and £500,000 (higher rates were applied above this point).
Under the new system, introduced overnight on 4 December 2014, an allowance of £125,000 is applied to every housing transaction. Stamp duty of 2 per cent is applied beyond the first £125,000, up to £250,000, and 5 per cent is applied from £250,000 to £925,000 (higher rates apply after this point).
The chart below (taken from the Brief) shows that the resulting savings on housing transactions are strongly concentrated in London. People buying averagely priced houses in inner London can expect to pay around £2,000 less in stamp duty, and people in outer London can expect to pay around £4,000 less. In contrast, people buying averagely priced houses in the Midlands and Northern England can expect to pay around £1,000 less.
The change – which, incredibly, was introduced almost instantaneously – represents an important intensification of the government’s approach to housing and the economy. Clearly, as the tax burden on housing transactions falls (at a cost of £800 million per year), every region will benefit to some extent. But London will benefit disproportionately, given that the housing market is a much more important part of its local economy than is the case everywhere else.
So Londoners get richer, and feel richer. The government is no longer just revving the engine – it’s also cutting the brakes.
The upcoming Budget offers George Osborne one last opportunity, before the general election, to convince the electorate that his economic plan is working, irrespective of the long-term risks to prosperity. While the stamp duty change grabbed the headlines at the Autumn Statement, at Budget 2014 dramatic changes to pensions regulation – removing the tax restrictions on early access and abolishing the need to annuitise for ‘defined contribution’ savers – stole the show.
Both reforms fit the same mould: primarily benefiting the already affluent, that is, people with expensive homes and very large pension pots, but playing upon more widespread concerns about housing costs and saving for retirement.
It is possible, in fact, that Osborne’s final trick will involve both pensions and the housing market – by enabling people to hold property investments within their pension, therefore sheltering them from tax to a greater extent. This move would be unlikely to end up as a tabloid splash, but it would significantly stoke the housing market by increasing incentives to buy-to-let.
Craig Berry is deputy director of Sheffield Political Economy Research Institute (SPERI)