They've gone and done it anyway

When rumours first emerged in early August that the UK Government was considering a stamp duty "holiday" to boost the housing industry, I blogged that it was a dumb idea (see "They've lost the plot", 6 August). Nobody in the mainstream media or the blogosphere seemed to think much of the idea, but today the Government has announced that it's going ahead and doing it anyway. It's still a dumb idea and it isn't going to work.

It's only a partial "holiday". Homes changing hands for less than £125,000 were already free of stamp duty; that exemption is now being raised to £175,000. Above that level, the 1% stamp duty rate remains intact, and the thresholds at which higher levels of the tax kick in remain unchanged. Apparently as many as 50% of all home sales take place below the new limit, and of course a very high proportion of those will be first time buyers, whom the Government is especially anxious to be seen to help.

So why won't it work? Well, first of all, it's pretty trivial in scope: the most any purchaser is going to save is £1,750. But with prices reportedly falling at a 10% rate (according to the Nationwide), any prospective buyer can save that much by waiting for about six weeks! As there is no sign of the price declines easing any time soon, the stamp duty cut may not even provide any short-term stimulus. Any smart buyer will wait until just before the stamp duty holiday ends, in order to benefit both from the tax cut and the seemingly inevitable further falls in house prices. So the market might see a big jump in transactions in about August of next year -- and who can say whether the stimulus will still be needed by that time?

The second reason the holiday won't work is that it's not addressing the real problem. In fact, it's not addressing a problem at all: there's nothing wrong with house prices falling, especially after the astounding increase we've seen in recent years. The problem for first time buyers is that they can no longer get financing on the silly terms that were available until the credit crunch began (or as we should be saying, until sanity returned to the market). Unless lenders believe that the stamp duty cut will stop prices falling further -- and they won't believe that for a second -- they'll be no more willing to lend to marginal borrowers tomorrow than they were yesterday.

You need more reasons? Well, if the stamp duty cut persuades some vendors to hold on to irrationally high asking prices, it will delay the needed correction the the market. And all experience suggests that measures like this don't change the number of transactions over a sustained period. They just alter the timing. So any boost in sales in August 2009 will be offset by a fresh slump later in the year -- at which point, no doubt, calls for another set of stimulus measures will immediately be heard.

As I've said before, stamp duty is badly structured and should be reformed. Reformed, not tinkered with.