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Eddy Tam

Location:

Oxford University Centre for Business Taxation

Area:

Taxation

Expertise:

International Taxation

By Eddy Tam

Relief for First-Time Buyers

The Autumn Budget 2017 announced a reduction in stamp duty for residential properties under £500,000 purchased by first-time buyers. But how much will first-time buyers actually benefit? Existing research suggests only 60% of the gain from this reduction will go to the buyer. Some first-time buyers should benefit more than others – for example, those who purchase properties closer to £300,000. The tax relief should help more potential first-time buyers realise their goal of buying a first property, but evidence suggests that around 225,000 will be helped over the next 5 years, much lower than the Government’s own projection of over a million.

The background is that from 22 November 2017, UK stamp duty for first-time buyers of residential properties costing below £500,000 was set to zero for the first £300,000, with a 5% charge on the remaining £200,000. This tax relief is not uniform in terms of its percentage impact. It represents a 0.75% cut for homes worth £200,000, a 1.7% cut for those worth £300,000 and a 1% cut for those worth £500,000. This affects a significant number of buyers and would-be buyers in the housing market. In the first half of 2017, the number of first-time buyers with a mortgage was estimated at approximately 160,000. The average cost of properties purchased by first-time buyers was £208,000 (Halifax, 2017; HM Treasury, 2017). This new measure can be considered from various perspectives.

  • Incidence

Stamp duty was formerly paid by all buyers, but this tax relief is unlikely to benefit only buyers. As the stamp duty cut will mean that first-time buyers can afford to pay more, this is likely to push up prices, also benefitting sellers to the first-time buyers. My research on stamp duty in Hong Kong provides evidence that stamp duty paid by sellers who own their properties for short periods of time is partly borne by buyers who buy from those sellers (Tam, 2017).

There are also some valuable past experiences in the UK from which to learn. From September 2008 to December 2009, the UK government introduced a stamp duty holiday which entailed a 1% cut for properties in the range of £125,000 to £175,000. Studies into this UK stamp duty holiday show that buyers received only 60% of the benefit of the stamp duty cut (Besley et al, 2014). Applying this percentage to the recent reductions for an average first-time buyer whose home cost £208,000, there is a £1,660 stamp duty cut, of which 60% (£996) is saved by the buyer – whilst the seller receives a higher price in the bargaining process, worth 40% (£664)

  • Heterogeneity

The tax cut is not uniform in terms of its percentage impact. As the biggest tax cut is for homes worth around £300,000, the most significant changes in buying activity can be expected for homes in this price range. As a result, homes in southeast England (where first-time buyers pay an average of £276,773), are likely to experience the biggest tax cuts by percentage – followed by southwest England and Greater London (where first-time buyers pay an average of £202,700 and £409,795, respectively[1]).

  • Effect on the number of new first-time buyers

Studies of the UK stamp duty holiday in 2008/9 have found that this increased the number of transactions in the short run by between 8% and 20% (Besley et al, 2014; Best and Kleven, 2017). However, this rise is likely to have been higher because there was a cut-off date for the end of the holiday which created an incentive to complete purchases by then. After the holiday there was a reversal in market activity as purchases had been brought forward. Overall, an estimate of the upper bound for the overall increase in transactions due to the stamp duty holiday is around 14% (Best and Kleven, 2017). This is a more reasonable estimate to use in evaluating the 2017 reform, since there has been no announcement of a date at which the current tax relief will end.

If there is a 14% response to the 2017 first-time buyer relief, how would the new reform affect the housing market? It has been estimated that the number of first-time buyers in first-half of 2017 was approximately 160,000 (Halifax, 2017)[2]. If we project from the first half of 2017, and in the absence of the tax relief, we get to 1.6 million first-time buyers over the next 5 years. A 14% increase in the number of transactions affected would then be around 225,000 over five years. This is considerably lower than the claim of HM Treasury that: “Over the next 5 years, this relief will help over a million first-time buyers get onto the housing ladder” (HM Treasury, 2017). The claim of over 1 million additional first-time buyers would represent an increase of more than a 60%– a sizeable magnitude, materially outside the range suggested by the relevant academic research on the impact of stamp duty holidays.

The Government is aiming to give first-time buyers a reduction in their tax burden to help them get on the property ladder. However, the savings to first time buyers are likely to be offset by rises in prices, and the number who really benefit seems likely to be much lower than that projected by the Government. The inability of millions of people to get a foothold on the housing ladder will be barely dented by the 2017 stamp duty cut.

 

Relevant CBT Research

Tam. H.F. (2017), Behavioural response to time notches in transaction tax: Evidence from stamp duty in Hong Kong and Singapore.

 

Other References

Besley, T., N. Meads and P. Surico (2014) “The incidence of transaction taxes: Evidence from a stamp duty holiday”, Journal of Public Economics 119, 61-70.

Best, M.C.  and H. J. Kleven (2018) “Housing Market Responses to Transaction Taxes: Evidence From Notches and Stimulus in the UK”, The Review of Economic Studies 85, 157–193.

HM Treasury (2017) Autumn Budget 2017 Stamp Duty Land Tax relief for first-time buyers.

Halifax (2017) First-time buyers paying record prices to get on to the property ladder

 

[1] Halifax (2017).

[2] UK estimate – since stamp duty is devolved in Scotland, the number relevant for the relief would be even smaller.

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