Housing Booms During the Covid Bust

Housing Booms During the Covid Bust

The Covid-19 lockdowns have had varying effects on different industries and sectors of the economy in 2020. While big box brick and mortar stores along with online retailers are thriving, small businesses have gone bankrupt and the oil and travel industries have dwindled to a halt. However, one sector that is doing surprisingly well is the housing industry in the UK.

Yes, you read that correctly, the housing market. At the precise time the UK GDP plunged nearly 20%, the most expensive commodity on the market is in full demand. How is this possible?

Well if you’ve ever heard the famous phrase “If you tax something you get less of it, if you incentivize something you get more of it,” then you will understand why.

In July of this year, Chancellor of the Exchequer, Rishi Sunak, instituted a temporary removal of the property stamp duty (formally known as the Stamp Duty Holiday). Stamp duty is the tax on the full property price of a home purchase. Below are the progressive rates which buyers are normally subject to pay. 

0%Up to £125,000
2%Over £125,000 and under £250,000
5%Over £250,000 and under £925,000
10%Over £925,000 and under £1,500,000
12%Over £1,500,000

To put this tax burden into context, the average UK salary is only £30,420 a year and the current average UK home price is £250,456. The cost of stamp duty on the average UK home is just over £2500, or 8% of the UK average salary. This brief respite from the stamp duty offers a significant discount to the property price, so it’s not surprising our trans-Atlantic cousins are taking full advantage of it. Mind you, homeowners are still liable for annual property taxes, known as council tax, which range from about £1000-£3000+ depending on your tax band.

*On a historical side note, the Stamp Act of 1765 was the catalyst of the American Revolutionary War. This was the first direct taxation imposed on the colonists by the British Parliament which eventually led to the armed rebellion.* 

Politicians often utilize consumption taxes to punish people from buying items they consider dangerous. New York state and New York City levy a combined excise tax on cigarettes that adds $5.85 to the cost of a box. Seattle imposes extra taxes on the purchase of firearms and ammunition.

Conversely, governments exempt tax on certain items they deem necessary to consumers. These items can vary from state to state and include medical equipment, food, footwear, etc. In the UK, children’s clothing is completely exempt from the 20% value added tax (VAT).

But whether the commodity is harmful or benevolent to the consumer, the consumption tax on said commodity works the same. The higher the tax, the less you will get of the product, the lower the tax, the more incentive there is to purchase the product. The stamp duty tax artificially inflates the cost of home buying in the UK, so naturally it deters the purchase of that product. 

Understanding this incentive system, is the key to economics. Individuals will always make choices based on what is in their best financial interest. Individuals will drive across state lines to purchase cigarettes at a cheaper rate, individuals will move to a new state entirely to pay 0% state income tax, and individuals will purchase property at the precise time they don’t have to pay the expensive stamp duty to save money. 

By leaving people alone, which in this case means allowing home buyers to keep more of their own money, individuals don’t just enrich themselves with a better home but also enrich others in the process. The uptick in home sales in the UK has kept realtors in business, estate solicitors in practice, private surveyors working, moving companies afloat, and an influx of much needed capital to countless other entities that provide goods and services for the home. The simple elimination of a single tax measure has compounded further economic activity. 

In The Wealth of Nations, Adam Smith wrote, 

“The natural effort of every individual to better his own condition is so powerful that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations.”

By suspending the stamp duty for just a short period, UK home buyers are able to improve their own quality of life with better homes and keep thousands of other people employed during a period of great economic strife. With that kind of natural stimulus for the UK economy, why not make abolishing the stamp duty permanent? 

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