Our obsession with house price growth is self-destructive

Linda J. Dodson

The Government’s review of capital gains tax has made many people very uneasy. It could be feasible that we all end up paying tax on the gains we made when selling our homes. We naturally hate the idea of that – 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, if someone bought a flat in London in 2010 for the average price of £309,786 and sold it in 2019, they would have received £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.

To some extent, the widening price chasms are counteracted by the fact that a person’s wage will have likely increased between when they buy and sell. And they will have more capital because they have been paying a mortgage rather than rent. Their borrowing capacity has therefore 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 in spite of 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.

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, it could provide an opportunity to get rid of stamp duty.

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

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.

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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