Hiking stamp duty at cross purposes
Governments don’t like it when markets won’t do what they want them to do. They rail against the outcome of the market and seek to intervene to redefine the results of trade. Put that way, interventions in the economy seem like an impersonal managerial exercise to perfect and improve people’s lives. Yet the truth is that “the market” is nothing more than the actions of individuals. When the administrative state acts against the market, it is acting against the judgments and decisions of individuals. Economic interventions, therefore, fundamentally constrain and undermine our freedom.

This is nowhere clearer than in our housing market today, where the government does not like the prices that homes have risen to and has imposed punitive stamp duties to try to change the situation. The raw effect of those measures is to deny some people the means and the right to buy a home at a price that they and the seller freely choose.

With an overweening influence on the market, the government has managed to create a system of impaired property rights, which makes it difficult for land redevelopment and urban renewal, by imposing massive fees on change of land use, controlling the release of unused land, mandating the reservation of some land for “small house” policies, and reserving huge swaths of land for public housing. The government sets out rules not only for building and labor, which are a driver of construction costs, but also for financing property, which starve smaller developers and potential developers of funds and reduce access to mortgages.

When all these rules work together to reduce supply and increase cost, it is bizarre to then complain about the high prices that result. The government may not like the market prices, but those prices are simply evidence that its policies are wrong. Yes, the present administration has made a bigger effort than its predecessors to increase the supply of land. Yet market prices are telling us that this is not enough or that it has been done the wrong way, and the mix of policies is not working.Will imposing an extra 15% stamp duty on most transactions do anything to reduce the cost of housing? It makes purchases more expensive, which will have an impact not only on demand, but also on supply. Government policy has already ensured that the private market for mass-market housing is more limited than it should be. Now, developers will be keener than ever to construct only for the less price-sensitive top end of the market.The impact on the secondary market is even more chilling. Liquidity is drying up, apart from the privileged few who own through company structures. Across the market sellers can no longer find buyers and transact at the prices they want. The government claims that it has “macro-prudential” reasons for slowing property markets, but interest rates are surely about to rise and that may well have an impact on property prices. Pity the poor market-savvy owners that think now is the time to sell – thus increasing supply. The government has pulled the rug out from under their feet while hampering its professed aim to see price fall.

It is always bad to reduce market liquidity. Stamp duties do precisely that by drying up transactions and making it harder for prices to adjust to information. Reduced liquidity thus frustrates buyers’ and sellers’ effort to find the right price. This works both when the market price wants to rise and when it wants to fall.A house is the largest asset most people will own and the biggest financial risk many will take. The housing market is not one that the government should lightly play with by imposing new charges without detailed research and evidence that they will have the desired effect. The government seems to be lashing out against the market price, which is merely the messenger bearing the message that policy has failed. This comes at a cost to our freedom.

Bill Stacey

Director

The Lion Rock Institute