Unwinding the Housing Crisis: Could abolishing Stamp Duty help?

In the third of a series of related blogs under the heading “Unwinding the Housing Crisis”, IF supporter Tim Lund looks at the arguments in favour of the case offered by some of the top thinkers in the field of housingDifferent Size Houses With Coins

So, ask LSE economists Christian Hilber and Teemu Lyytikäinen – authors of a paper entitled “Could Abolishing the Stamp Duty Solve the UK Housing Affordability Crisis?” – and while reluctantly admitting that, by itself, it probably could not, it would make a difference – by encouraging “a more efficient allocation of space, with fewer underused or unused rooms”. It’s a very intergenerational argument; as the authors put it:

“Consider a stylized world with 50 small flats and 50 big houses and 50 empty nesters and 50 households with children. Initially the match is bad so that half of the units are misallocated. Now relocation costs are reduced significantly – not to zero because there are other moving costs apart from the SDLT – and the match becomes nearly perfect: the empty nesters move to the flats and the young families relocate to the larger houses.”

Filling the gap

Abolishing a tax sounds attractive, but when drawing up budgets, Chancellors like to know where revenues lost are going to be recovered. It could be from an offsetting increase in general taxation, or linked to a specific tax increase elsewhere, perhaps addressing the political problem of being too generous to property owners – or in this case, buyers.

Thanks to a quirk in the structure of SDLT – Stamp Duty Land Tax is its name in full – the authors can show that its 3% top rate is very inefficient: “the welfare loss associated with the rate increase from 1 to 3 percent is between 36 and 47 percent of the additional revenue generated by the tax increase.” In other words, more efficient taxes replacing SDLT need not be as onerous.

What those taxes might be is a separate question. The authors suggest “an annual local Land Value Tax or property tax”, which would be fair in the sense of not requiring the general taxpayer to support property owners, and suggests a welcome element of local accountability. However, unless the joy of abolishing one tax is to be spoiled by creating another, this amounts to raising more money from Council Tax, which governments have shied away from for decades.

Hopefully abolishing SDLT could be a valuable quid pro quo in a thought-through strategy for such a reform, which would also need to address the problem of shifting the burden from those buying to those owning property. Often these will be “asset rich, tax poor” – the same older, empty nesters who, from the point of view of achieving better use of the housing stock, ought to be moving out – so this tax change would help this process, but the hoped-for “thought-through strategy” should also include measures to make this process easier.

Part of the solution

So abolishing SDLT would at least help solve the housing crisis; but still, the authors stress, “Britain is bad at putting houses where they are most needed,” and conclude that we need to “fix the planning and tax systems, so they can provide the right incentives to local authorities to build housing where it is most needed.” Indeed – and in further “Unwinding the Housing Crisis” blogs I hope to look more into the thinking of these authors and others from the LSE Spatial Economics Research Centre.