Osborne should beware lure of stamp duty cash

It is hard to see how any genuinely dispassionate observer looking at a still struggling construction sector and working out where external might be most needed, would come to the conclusion that George Osborne has come to this week – to put the money, nearly £7bn of it – into the housing market.

Because all the indicators show that housebuilding is the one area of the construction economy already registering incredibly strong growth, up between a fifth and a quarter on this point last year, according to the latest output data.

Meanwhile the ONS’s most recent data shows that all other sectors of the construction economy were still marginally down over the last three months on the same period last year. And this is without the added concern that further demand-side stimulus in the housing market is in danger of creating an unsustainable bubble.

So what is going on here? Why is Osborne pouring resource into the one part of the industry that’s already flourishing?

The answer is two-fold.

Firstly, at the highest level, is because it is working. The last four years saw Osborne looking increasingly desperate, pulling policy levers to boost investment and construction work in infrastructure. While this government’s co-ordination of infrastructure priorities has been welcomed, by and large it hasn’t really worked in boosting construction output.

Politicians – particularly ones without lots of cash – quickly realise that it is much harder to actually effect change than might be assumed from the outside. But Help to Buy has been different. Not only has the housing market seen a marked improvement since he introduced this policy, just one year ago, but it has been widely recognised as Help to Buy that has been the crucial catalyst to that revival. It has provided the confidence on which private sector expansion has been based.

For a politician like Osborne this is manna from heaven, and gives him reason to want to do more.

But the second part of the answer is what allows him to do it: stamp duty revenues. Put simply the strengthening of the housing market seen in the last year has provided the biggest boost to the Treasury’s coffers of any single measure introduced last year. As the Office for Budget Responsibility finds in its report today: “The largest drivers of our downward revisions to borrowing in 2013-14 are an upward revision to stamp duty receipts (due to higher house prices and property transactions) and a downward revision to debt interest costs (due to lower inflation).”

Paula Higgins, chief executive of the Home Owners Alliance today called Stamp Duty Osborne’s “dirty little secret.”

The numbers are stark. Basically the predicted uptick in revenues from Stamp Duty vastly outweigh the cost of introducing Help to Buy Equity Loan – and virtually all the other measures he has promised. Last year at Budget time the Treasury estimated Stamp Duty revenues between 2014-18 would be £39.9bn. Today it has revised this estimate up by 50%, to £59.6bn. In six short years from 2012, the amount collected will have trebled in value.

In other words, the strength of the housing market response to Help to Buy has given him an extra £20bn to play with over four years – about £5bn extra per year.

Of course the vast majority of this is collected in London and certain parts of the South east where homes regularly breach the £500k trigger for payment of SDLT at 4%.

No wonder, then, that Osborne today ignored calls from the property industry for fundamental reform of Stamp Duty to make it fairer. He can’t change it; it’s too much of cash cow.

It’s why the Home Owners Alliance is so upset that buyers are being penalised by a tax which tends to limit the number of house sales each year. Paula Higgins, chief executive of the body today called it Osborne’s “dirty little secret.”

“Government needs to take a radically different approach to stamp duty to make it fairer on homeowners and to help fix the dysfunctional housing market,” she says. “As a minimum, take the pressure off the majority of homebuyers looking for a roof over their heard by raising the level at which stamp duty is charged.”

The industry, though, will be more concerned about what the impact on reasoned policy-making of all this is. Clearly making the government dependent upon revenues gained from a housing price bubble in London and the South east is not conducive to good decision-making. It is, in fact, exactly what the nay-sayers against Help to Buy have been warning would happen all along.

Three years of boom will be no consolation to the housing industry if we see another collapse similar to 2008.

But for the wider industry question will be when their parts of the sector will receive equivalent help. Unfortunately, with government investment in other types of construction unlikely to prompt as significant an immediate improvement in the Treasury’s coffers, it should be no surprise the chancellor will keep his eye on housing, however little the sector still needs his help.

Joey Gardiner is deputy editor of Building