The rate of house price growth has seen many first-time buyers (FTB) struggling to get onto the housing ladder over recent years.
It has been apparent for a while now that house prices are far too high for many first-timers to afford. The lack of FTBs able to enter the market cuts out what is an essential element for keeping the property market buoyant.
Of course, lenders have done everything they can in order to help FTBs get their first foot on the property ladder, by offering 100 per cent loan-to-values, guarantor mortgages and joint mortgage arrangements.
However, lenders cannot solve all of the problems faced by the FTB. If the basic price of a house wasn’t high enough already, they are then hit with a number of obligatory extra costs such as conveyancing fees and Stamp Duty.
Unlike 10 years ago, the average house price in all UK regions is now subject to Stamp Duty, which means that the majority of consumers are now affected when buying a property.
Hitting hard
While any extra cost is damaging to a FTBs chances of getting on the property ladder it is Stamp Duty, which tends to hit the hardest.
The current rates of between 1 per cent and 4 per cent, depending on the price of the property, mean that buyers can end up adding many thousands of pounds onto the final purchasing cost.
Despite a recent increase in the Stamp Duty threshold, high property prices mean that very few houses fall below the threshold. Research has shown that over the last 10 years the average annual gross income in the UK rose by 54 per cent.
However, the average Stamp Duty bill rose by a massive 289 per cent over the same period. In real terms the average Stamp Duty bill has risen from £688 in 1997 to £1,989 in 2007.
When you consider that some FTBs are taking out mortgages at up to five times their salary that doesn’t leave much to cover the Stamp Duty bill.
It is clear, therefore, that something needs to be done to help FTBs get a foot onto the housing ladder, but what are the possible options?
Potential solutions
The most obvious solution is to scrap Stamp Duty for all FTBs. June last year saw the abolition of Stamp Duty for FTBs in Ireland for those buying their first property on or after 31 March 2007.
How this new bill has affected the Irish government has yet to be revealed but it is certainly a step in the right direction, and an example that perhaps we should be following.
Obviously if Stamp Duty was abolished in the UK, the government would lose some income but as an overall proportion of total revenue from Stamp Duty this is a reasonably small amount when you consider that FTBs only accounted for one in three property purchases in 2006.
Another option is to raise the nil-band threshold or offer concessions on house purchases for FTBs. This has already been introduced in Italy and Israel where first-timers pay a lower rate of Stamp Duty to those moving up the ladder.
Recent research showed that Stamp Duty was the fourth most hated tax in the UK, with one in 10 Britons wishing to see it abolished. To be fair to all parties involved, the most viable option seems to be for Stamp Duty to be treated as a proportional tax, similar to income tax.
This would involve introducing a tiered interest rate in which consumers are only taxed on the proportion of their property value that exceeds the Stamp Duty threshold. By introducing such a scheme, the ‘price bunching’ effect that Stamp Duty can have around thresholds will be reduced, allowing properties to sell for their true values.
Easing the process
Introducing these changes will ease the home buying process for many consumers – especially FTBs. With property sales slowing and forecast to continue to slow throughout 2008, people must be encouraged to keep entering the property market.
This measure would prevent those wishing to climb the property ladder but who are ultimately discouraged by a potentially unaffordable tax bill.
Whichever option becomes most viable one thing is clear, and that is that something must be done about the current levels of Stamp Duty in order to keep the property market afloat.
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