Budget presents an opportunity to boost construction
Published: 6 March 2013 | Author: Bernard Clarke
Recent data highlights the contrast between a modest increase in mortgage lending and a year-on-year fall in house-building. The data has triggered speculation about what the chancellor might do in his forthcoming Budget to promote activity, given that the government has identified housing as an engine for growth. We understand, however, that the chancellor views his scope for intervention as severely constrained by the UK’s fiscal position.
Despite the difficulties for the chancellor, we urge him to use the Budget to enhance the NewBuy scheme which continues to operate on a relatively modest scale but is now beginning to gather momentum. We urge the chancellor to:
- extend NewBuy beyond 2015; and
- address the anomaly under which the scheme allows access to home-ownership with a 5% deposit but means that a buyer is likely to be taxed because the purchase is liable for stamp duty.
Trends in construction and lending
Construction data recently published by the Department for Communities and Local Government (DCLG) shows that there were 26,830 housing starts in England in the fourth quarter of 2012, 1% more than in the preceding three months. Private housing starts were 2% higher, while housing association starts were 10% lower. In 2012 as a whole, there were 98,280 housing starts in England, 11% fewer than in the preceding year.
Construction rates are at a remarkably low ebb, even by recent standards. Although seasonally adjusted starts are back above their 60-year low point in the first quarter of 2009, they are still 45% lower than the recent peak in the first quarter of 2007. Before the credit crunch, construction was more buoyant: between 2000 and 2007, UK housing starts averaged more than 200,000 a year. But in the 1960s – the golden decade of post-war UK house-building – there were at least 300,000 starts every year and in two years, 1964 and 1967, the number of starts exceeded more than 400,000.
Mortgage lending has also been subdued since the credit crunch. Tighter lending criteria and a shortage of mortgage funding have restricted the availability of loans, while demand has been dampened by falling real incomes, economic uncertainty and low levels of consumer confidence.
More recently, however, there have been encouraging signs of growth in lending for house purchase, including increased activity by first-time buyers. This year, we expect gross lending, which has hovered at around £140 billion a year since 2009, to increase by around 8% to £156 billion. Meanwhile, more than 216,000 first-time buyers became home-owners in 2012, a 12% increase on the preceding year and the first time since 2007 that the number has exceeded more than 200,000.
In the past, we have called in our pre-Budget submissions for comprehensive reform of stamp duty. The inefficiencies, iniquities and market distortions created by stamp duty have been widely criticised not only by lenders, but by many other others in the housing market and by numerous commentators. The case for reform was highlighted again in a lengthy article in the Financial Times to which we contributed at the end of February.
In providing a 'lender’s view' for the Financial Times article, we explained out that in current market conditions liability for residential stamp duty is a major factor in decisions about buying a property.
We agree with the Mirrlees review of the UK tax system, published 18 months ago, which concluded that stamp duty was inefficient, discouraged mobility and meant that properties were not held by the people who valued them most. The "slab" structure, under which the highest rate of stamp duty is applied to the whole purchase price creates "perverse incentives," Mirrless said. The only thing in favour of stamp duty, the review found, was that it was easy to collect – but that was not a good enough reason for retaining it.
Replacing the slab structure with a system in which higher rates are only levied on the amount above each threshold would at least reduce the price-distorting effects of stamp duty. However, this reform implies a loss of revenue to the Treasury, and would also create winners and losers among taxpayers. The likelihood must therefore be that, despite the overwhelming case for reform, any significant review of stamp duty will remain on the side lines, particularly at a time when it is difficult for the chancellor to forego revenue.
Nonetheless, all recent governments have recognised that stamp duty deters buyers, and can thwart broader policy objectives – particularly when trying to realise the potential for housing to be an engine for growth. Both the existing coalition and former Labour governments have permitted stamp duty "holidays" – usually to provide help to first-time buyers – even though they have shied away from more fundamental reform.
In Scotland, however, the government is proposing much more comprehensive reform of stamp duty when it takes control of the tax from 2015 onwards. It has introduced a bill to move away from the "slab" structure to a more progressive system, under which it is intended that the amount paid will relate more closely to the value of the property. We await more details of the tax rates to be applied, but welcome the intention to address the long-overdue issue of reform.
Continuing support for NewBuy
At the end of February, the DCLG published new data showing continued expansion of the NewBuy scheme in England. (A scheme modelled on NewBuy, called MiNewHome, also operates in Scotland, and we are discussing the launch of a similar initiative to encourage sales of newly-built property in Wales.) The data shows that NewBuy is continuing to expand, with more than 1,500 completed purchases in the first 10 months of the scheme.
Chart One: Completed transactions through the NewBuy scheme in England
Perhaps even more encouraging for the government is the popularity of NewBuy with first-time buyers. Our analysis of the data shows that purchases by this group of buyers account for two-thirds of all NewBuy completions to date, compared to only 40% of all sales of newly-built property.
Since NewBuy was launched in March 2012, we have sought to explain that the initiative would take time to build momentum. Because home-buying is a lengthy process, the first transactions were not completed until later in the spring. Familiarity with the scheme has also taken time to build. But the data now shows an encouraging expansion of the scheme as it becomes better known and is further modified to realise its potential – with, for example, a trial to allow part exchange of property. DCLG data shows that almost 900 properties were bought through NewBuy in the final quarter of 2012, more than twice as many as in the preceding three months.
As the chancellor completes preparations for his forthcoming Budget later this month, we believe that he could consider measures to build on the success of NewBuy, and help the scheme deliver to its fuller potential:
- We would like to see the scheme extended beyond 2015. Although NewBuy was launched in England a year ago, almost 900 of the 1,500 transactions so far were completed in the last quarter. In Scotland, MiNewHome was only launched late last summer, and a similar scheme is not expected in Wales until later this year. Given that NewBuy and similar initiatives in other countries take time to gain momentum, we are concerned that closure of the scheme in 2015 could come just as it is beginning to yield the strongest results.
- The chancellor should also look at a favourable tax treatment for buyers under the scheme. Given that NewBuy allows access to home-ownership for borrowers with a deposit of only 5%, we believe the government should look at the anomaly that means that many of these buyers are taxed on their purchase because it is captured by stamp duty. For those buying properties for more than £250,000, stamp duty adds a further 3% to their costs. There is a real anomaly and potential impediment here, in a scheme which is trying to limit up-front costs for creditworthy borrowers with limited savings.
We understand that the chancellor has limited scope in his forthcoming Budget. But that makes it even more important to maximise the potential of the existing NewBuy scheme, particularly as it is also supported by the Funding for Lending initiative, which has helped improve the price and availability of mortgage finance. We therefore urge the chancellor to use his Budget to enhance and extend NewBuy – alongside other measures he may be planning. This could be done with little cost or risk of increased exposure by the government.