Real estate, alternative real assets and other diversions

Stamp duty, mobility and the housing crisis How replacing stamp duty with better-designed local taxes could alleviate the crisis of housing availability

The Guest Essay

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The stamp duty — a tax to be paid on the transfer of certain legal documents — has a long history in England. It was first introduced in 1694 to help finance the war against France. Although initially thought as a temporary solution, the tax was so successful in raising revenue that it eventually evolved into a permanent form of UK taxation. While in recent decades global competition has reduced the scope of stamp duty on the trade of financial assets, stamp duty on transactions of land and property is today more significant than ever. Revenue from the stamp duty land tax (SDLT) has almost tripled over the last eight years, from £2.9bn in 2008-09 to £8.6bn in 2016-17.

The SDLT (commonly labelled ‘stamp duty’) has long been criticised by economists as being inefficient. The central case against it is that it hampers household mobility. The 2011 Mirrlees Review neatly summarises the key argument:

“By discouraging mutually beneficial transactions, stamp duty ensures that properties are not held by the people who value them most. It creates a disincentive for people to move house, thereby leading to potential inflexibilities in the labour market and encouraging people to live […] in properties of a size and in a location that they may well not otherwise have chosen.”

There are some prior studies documenting a negative effect of the stamp duty on housing transactions and mobility, but to date we know little about the nature of affected moves. Specifically, there is no evidence of the relative importance of the SDLT for the functioning of housing and labour markets. In a new article, published in the Journal of Urban Economics (Hilber and Lyytikäinen, 2017), we provide some answers by exploring the impact of the SDLT on different types of mobility.

Before 2014, the UK stamp duty had the odd feature that the tax rate for the whole purchase price jumped at certain thresholds. For example at £250,000 the rate jumped from 1% to 3% of the value (a £5,000 increase in tax liability). We exploit this discontinuity to isolate the impact of the stamp duty from other determinants of mobility. Essentially, we compare mobility rates of otherwise similar homeowners with self-assessed house values below and above the threshold.

The “slab” structure of the SDLT was replaced with a more progressive “slice” schedule in 2014. Our data is from a period before the reform and we utilise the discontinuities of the old system to identify the impact of the SDLT. The results are, however, informative of the effects of SDLT on mobility in the current system too. The reform removed the discontinuities in the tax liability and the bunching of transactions just below the old thresholds. However, it did not alter substantially the overall tax burdens, somewhat lowering them at the bottom end and increasing them at the top end of the price distribution. Thus the tax-induced disincentive to move remained.

Figure 1 below illustrates our research design and key results. We use the British Household Panel Survey (BHPS) to analyse how the 2%-point increase in SDLT affects mobility of homeowners. The BHPS includes homeowners’ own estimates of the value of their home. When we plot mobility rates in house value bins around £250k in Panel A of Figure 1, we find a clearly visible reduction in the rate of mobility when the self-assessed house value exceeds £250k and the tax rate rises from 1% to 3%.

Figure 1: What happens to mobility when stamp duty increases from 1% to 3%?

The BHPS also contains information on the distance of moves and on the main reasons for moving. Interestingly, when we split moves by distance of move (shorter than versus longer than 10 kilometres — Panels B and C in Figure 1), we find a large effect on short moves but no effect on long moves. The stamp duty appears to prevent moves to a more suitable dwelling locally but has little impact on long-distance relocation.

A similar picture emerges when we divide moves into three groups based on survey responses regarding the main reasons for moving (Panels D to F in Figure 1). The stamp duty affects housing- and area-related moves but has little effect on job-related or major life event-related mobility. We should note that job-motivated mobility is overall very rare among owner-occupiers. Nevertheless, all in all our findings strongly suggest that the stamp duty jams the housing market by preventing households from moving to more suitable homes but its effect on relocation of the labour force appears to be quite limited.

A potential explanation for the differential effects is that when moving to a more suitable house locally — say one bedroom more or less — the benefits of moving often exceed the costs only by a narrow margin. Therefore even a small increase in the tax wedge can prevent a large fraction of moves. Longer, often job-related moves — say a great job opportunity in another city — implies large benefits of moving and in turn that the SDLT burden may not be pivotal in most cases.

The Guest Essay, The Professor

About Christian Hilber and Teemu Lyytikainen

Christian Hilber and Teemu Lyytikainen

Christian Hilber is Professor of Economic Geography at the London School of Economics. He is an Associate of the Centre for Economic Performance (CEP) and of the Spatial Economics Research Centre (SERC). He is also a Member of the Academic Panel of the What Works Centre. He has been the Director of LSE’s MSc Real Estate Economics and Finance since 2003. Teemu Lyytikainen is chief researcher at the VATT Institute for Economic Research. His research subjects include housing markets, urban economics and housing taxes and subsidies. Teemu has also worked as a Secretary-General of the Economic Policy Council and as a researcher at the Spatial Economics Research Centre of the London School of Economics. He gained his PhD in economics from the University of Helsinki in 2008.

Articles by Christian Hilber and Teemu Lyytikainen

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