Sunday, September 03, 2017
Taxes and uncertainty blight Britain's housing market
Posted by David Smith at 09:00 AM


My regular column is available to subscribers on This is an excerpt.

Hope springs eternal in Britain’s housing market. Estate agents look forward to the next buying and selling season, in this case the autumn, with touching optimism, no matter how bad things are now.

When Bank of England figures a few days ago showed slightly stronger mortgage approvals than expected in July, some seized on it as a sign of revival. The reality, however, is rather different.

Estate agents themselves, via their representative body the National Association of Estate Agents (NAEA), reported on Thursday that the supply of homes available to buy recorded its lowest level for any July since 2002. Demand for properties also fell, with the number of house hunters on estate agents’ books down 10% on the previous month. The old joke, that estate agents do not look out of the window in the morning because it would give them nothing to do in the afternoons, has more than a ring of truth about it.

The NAEA survey chimed with that earlier last month from Rics, the Royal Institution of Chartered Surveyors. Its latest residential survey showed record low stocks of homes for sale, falling sales, and weak vendor instructions and new buyer enquiries.

There is a Mexican stand-off in the housing market – buyers and sellers are playing a lengthy waiting game – and the tumbleweed is blowing down Acacia Avenue.

The stand-off has had the effect of taming house-price inflation. A shortage of sellers and buyers has given us what I call a low-activity equilibrium, in which prices are not rising by very much, if at all. Both the Nationwide (2%) and the Halifax (2.1%) house price indexes have annual house-price inflation down sharply on last year.

For a time people’s reluctance to sell, and the consequent shortage of houses on the market, kept prices rising at a reasonable pace. Now there has been a change.

The NAEA found that only 3% of properties sold above their asking price in July, while 80% sold for below asking price. Rics, in its survey, suggested that the biggest percentage cuts relative to asking prices were for £1m-plus properties, but across the market significant numbers of properties were selling below asking price.

Nobody should mind much that house price inflation is down and is, according to the Nationwide and Halifax. unusually is below general inflation in the economy for the first time in a long time.

Many would say that what the housing market needs is a big fall in house prices to boost affordability and break the logjam. George Buckley, an economist with Nomura, the Japanese investment bank, suggests that prices could fall by 20%, admittedly between now and 2030, if interest rates “normalise” to 4%.

That is the catch. House prices do not fall spontaneously. A fall in response to higher interest rates would be swings and roundabouts for home-buyers; the helpful effects of a fall in prices on affordability being offset by the unhelpful effects of higher mortgage rates.

There is another catch. When house prices fell during and after the crisis, if relatively briefly, lenders responded defensively, notably by offering far fewer low-deposit mortgages, and at higher interest rates. Lower prices did not improve access to the market for first-time buyers but did the opposite.

What we should mind about is that activity levels in the housing market remain well below pre-crisis norms and, it appears, are going nowhere. Healthy turnover in the housing market does not just matter for estate agents.
It matters that people can move as their job circumstances and location change, the mobility that oils the wheels of a dynamic economy. Though the proportion of first-time buyers has picked up, low levels of housing transactions are closely associated with declining home-ownership.

Owner-occupation has declined overall, even as it has been increasing among older age groups. For 25-34 year-olds it has dropped from 60% to 39% over the past 20 years, while falling from 72% to 58% for 35-44 year-olds. If home ownership is economically and socially beneficial, and the government thinks that it is, too many people, particularly young people, are missing out on it.

Sometimes when faced with criticism of aspectrs of the economy, the government leaps to the defence. When it comes to the housing market, however, that is not going to happen. It would be hard to come up with anything more damning than the government’s own verdict earlier this year that the housing market is “broken”, its white paper setting out its ambitions of fixing it.

Some of the weakness in housing activity is directly related to the weaker economy, at the Nationwide pointed out in reporting a 0.1% fall in house prices last month and the 2% annual rate. But, as it also pointed out, record employment would normally be expected to be boosting the market, as would ultra low interest rates.

Consumers, apart from suffering a real income squeeze, are also concerned about the wider economy, according to the latest GfK consumer confidence barometer. Though it showed a small uptick in overall confidence last month, it also showed that households are gloomier about the economy than they were a year ago.

Some of the activity weakness, however, is directly in the government’s control. Stamp duty receipts - £12.8bn in the latest 12 months – are soaring, and only partly because of the recently introduced 3% levy on second homes and buy-to-let properties. Ministers and officials known that a good way of stimulating housing market activity is to cut stamp duty or exempt properties from it. Whether he still has political Moggmentum or not, the Tory MP Jacob Rees-Mogg has called for a cut in stamp duty.

I would go further. The experiment with high housing transaction costs, including stamp duty, has run its course and the results are in; they reduce turnover. The effect is most striking at the top of the market, where stamp duty levels are eyewateringly high, but it is also there elsewhere. Far better, as argued in the Institute for Fiscal Studies’ Mirrlees review of a few years ago and elsewhere, to tax property differently.

A land value tax, which as its names suggests taxes property owners on the value of their land and increases in that value, has been around as an idea for a century and a half. In theory it could replace, not only stamp duty but also council tax and business rates. For if we carry on taxing housing transactions as we do now, we can expect the torpor to continue,