Fix­a­tion on house price growth is bizarre

‘If house price gains were no longer sacro­sanct, sellers might not be so keen to hike their price tags’

The Daily Telegraph - Business - - Business Comment - Melissa law­ford

The Gov­ern­ment’s re­view of cap­i­tal gains tax has made many peo­ple very un­easy. It could be that we all end up pay­ing tax on the gains we made when sell­ing our homes. We nat­u­rally hate that idea – it has al­ways been a right to make profit on our as­sets. But the fact is the hous­ing mar­ket would work bet­ter if we did not want to profit at all.

I am per­haps about to talk my­self out of a job, but our ob­ses­sion with house price growth is frankly bizarre. Why? Be­cause when the gain is too big, the vic­tory is pyrrhic. Se­ri­ous house price growth does not just shut would-be buy­ers out of the hous­ing mar­ket, it stran­gles it from the in­side.

Big price rises that al­low a seller to profit from the sale of their home also mean it is dis­pro­por­tion­ately harder for them to buy a larger one.

Frances Clacy, of Sav­ills es­tate agents, said se­cond-step­pers have been the big­gest losers in the ar­eas of Bri­tain that have seen the great­est house price growth.

For ex­am­ple, some­one who bought a flat in Lon­don in 2010 for the av­er­age price of £309,786 and sold it in 2019, would have got £552,733 – a nice 44pc gain of £242,947, ac­cord­ing to Sav­ills.

But prices were ris­ing across the mar­ket. Over the same time pe­riod, the cost of the av­er­age ter­raced house jumped by 43pc to £677,627.

It sounds rel­a­tive, but it isn’t. Be­cause of the higher start­ing point for the ter­raced house, the value gap be­tween a flat and a ter­raced house has jumped by 60pc – from £77,956 to £124,894.

In the South East, a ter­raced house in 2010 cost 20pc more than a flat. In 2019, the dif­fer­ence had jumped to 31pc – a to­tal price gap of £71,687. This is more than dou­ble the bill nine years ear­lier.

And it’s ac­tu­ally slightly less than in 2018, when the gap was 32pc, be­cause prices in the South East fell last year. The pro­por­tional price dif­fer­ences roughly fol­low the map of the coun­try’s hous­ing cy­cles. In the re­gions that re­cov­ered more slowly af­ter the fi­nan­cial cri­sis, the gaps are smaller, but they are widen­ing.

In the West Mid­lands, for ex­am­ple, a ter­raced house last year cost £170,002 – 13pc more than a flat. In 2018, the dif­fer­ence was only 10pc. Here, the dif­fer­ence has jumped at a par­tic­u­larly steep rate be­cause house prices rose while the value of en­trylevel flats fell year on year.

To some ex­tent, the widen­ing price chasms are coun­ter­acted by the fact that a buyer’s wage is likely to have in­creased be­tween buy­ing and sell­ing. And they will have more cap­i­tal be­cause they have been pay­ing a mort­gage rather than rent, mean­ing their bor­row­ing ca­pac­ity has grown.

But to be clear: they are not able to move up the lad­der be­cause the value of prop­erty has in­creased, they are able to do so de­spite price rises.

In­creas­ingly, peo­ple are un­able to up­size at all. In 1988, the av­er­age per­son moved house every 8.6 years, ac­cord­ing to prop­erty web­site Zoopla. In 2019, it was every 20.3 years. The cu­mu­la­tive an­nual value of trans­acted homes in Bri­tain has plunged by 40pc over the same pe­riod. House prices may have risen, but as a na­tion we are now spend­ing bil­lions less on homes than we did in the Eight­ies.

Agents will ar­gue that stamp duty changes have caused this. But the changes in­tro­duced in 2014 only in­creased the tax bill for more ex­pen­sive homes. It re­duced the bill on lower value prop­er­ties. Any­one buy­ing a prop­erty for less than £937,500 paid less tax in 2014 than they would have a year ear­lier.

Cap­i­tal gains re­form to in­clude pri­mary res­i­dences would be worth an ex­tra £26.7bn a year to the Trea­sury, ac­cord­ing to the Na­tional Au­dit Of­fice’s cal­cu­la­tion from the 2018-19 tax year.

The tak­ings would be so big that it could pro­vide an op­por­tu­nity to get rid of stamp duty al­to­gether.

The So­cial Mar­ket Foun­da­tion, a think tank, cal­cu­lated the Trea­sury would rake in £481bn over 25 years even if it only charged cap­i­tal gains tax at 10pc (lower than the 18pc and 28pc charged on sec­ondary res­i­den­tial prop­er­ties), scrapped stamp duty and in­her­i­tance tax on prop­erty, and funded new first-time buyer in­cen­tives worth £600m a year.

If movers pay cap­i­tal gains in­stead of stamp duty, they will end up pay­ing more tax over­all. But at least they will be pay­ing an amount based on how much they have prof­ited, not based on how much they are spend­ing at a time when they are most fi­nan­cially stretched. There would need to be an in­cen­tive for down­siz­ers to stop them from be­ing de­terred from sell­ing up to avoid big­ger tax bills. But they would ben­e­fit from hav­ing a big­ger pool of buy­ers if stamp duty was no longer a bar­rier to pur­chases.

And per­haps, if house price gains were no longer sacro­sanct, sellers might not be so keen to hike their price tags.

Steady house price growth, roughly in line with in­fla­tion and wage growth, would be the thing that would make the hap­pi­est hous­ing mar­ket.

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