The economics of cutting stamp duty
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
Stamp Duty
Liz Truss will announce plans to cut stamp duty in the government’s mini-budget this Friday, according to a report in this morning's Times.
There is no detail on when or how it would be implemented at this stage, and to be fair no guarantee it will be announced. If it goes ahead it will be the biggest sign so far that Ms Truss is going to focus on tax reform that, in her view, will support economic growth. With only two years to the next election – Truss is placing a lot of political capital on the hope that the economy responds rapidly.
In defence of the move on stamp duty - housing market activity is a substantial driver of economic growth. Each existing home sale carries a net contribution to GDP of £9,559 when spread across renovations, spending on household goods, removals, surveys, agent and legal fees and so on. All-in-all, every 100,000 transactions supports more than 11,500 jobs. That's according to research we conducted with the Home Builders Federation in 2020. Here is more from Knight Frank head of UK residential research Tom Bill this morning: -
“Nobody can accuse the new government of lacking an economic vision. If its low-tax approach extends to stamp duty, recent history tells us it will trigger higher levels of demand in the housing market at a time when mortgages are getting more expensive, which will support social mobility. Prices could move higher in the short term if supply initially struggles to keep up but more balanced conditions will return provided the cut is immediate and permanent.”
Currency discounts
Whatever the merits of the various tax cuts, the prospect of stimulating spending while inflation is running hot has rattled financial markets. The pound has been wallowing at its lowest level relative to the dollar since 1985.
It's not all the weakness of the pound, of course. The dollar has grown in strength versus a series of other currencies and hit parity with the euro a few weeks ago. The US economy is proving resilient, paving the way for more aggressive rate hikes, plus safe-haven investors have been busy buying the greenback.
A weak pound will act as a shock absorber for some parts of the economy, supporting the share price of London-based companies who are paid in dollars, for example. The same is true of the residential property market in London’s prime postcodes.
The exchange rate fell from US$1.71 at the start of July 2014 to US$1.15 in early September this year, highlighting the size of the relative discount for US buyers and those denominated in pegged currencies such as the Hong Kong Dollar and parts in the Middle East. Property prices also fell 13% over the eight-year period due to political uncertainty, tax hikes and international travel restrictions.
That's opened up some substantial relative discounts – with the largest discount found in Knightsbridge, an area of the capital where prices are still around a fifth lower than their 2014 peak in pound terms but 49% lower in dollar terms.
Playing catch up
Sweden's Riksbank raised interest rates by a full percentage point yesterday, bringing the key rate to 1.75%.
Inflation is running at 9% and house prices have been falling for several months. Data from Valueguard suggests those declines already run to nearly 9% and Nordea is anticipating a peak to trough decline of 15%. We're seeing similar patterns in several of the pandemic's most active housing markets, including Canada and New Zealand.
The Riksbank was slow to begin raising interest rates and, like several other nations, is now playing catch up. While central bankers talk mostly about responding to domestic signals, they are really in the grip of external events - particularly when it comes to action from the Federal Reserve. Adam Tooze published an excellent explainer on the interconnected nature of central bank action on inflation over the weekend that included this from Columbia University economist Shang-Jin Wei:
"An interest-rate hike by any major central bank has the effect of exporting inflation to other countries, forcing other central banks to raise interest rates more than they otherwise would have done. For example, when the Fed raises its interest rate, if the BOE and the ECB do not respond, the pound and the euro would depreciate against the US dollar, leading to higher import prices and adding to the already high inflation.... the result is an interest-rate spiral that is more damaging to world output and employment than these countries may wish to see collectively."
The return of the "dot plot"
That spiral is set to continue when the Fed publishes the results of its latest meeting today. Markets expect a third consecutive 0.75% hike, which would bring the federal funds rate to a new target range of 3% to 3.25%.
Perhaps more anticipated than the hike itself will be the so-called "dot plot" to be published alongside the decision. The plot is effectively a compilation of officials’ interest rate projections for the period through to the end of 2025. Economists at Goldman Sachs believe the Fed will hike interest rates four more times between now and the end of 2023, eventually holding them at a range between 4.25% to 4.50% until 2024.
The Bank of England will follow suit tomorrow. Market pricing implies we'll see a 0.75% hike, with rates peaking at 4.5% next year. That would be the biggest single tightening in more than thirty years.
In other news...
On Monday, October 3rd at 12:30pm, our experts will be answering your most pressing property market questions, from interest rates and house prices to supply and demand - sign up here.
Plus, a rural wish list for Liz Truss.
Elsewhere - four-day working week backed by 86% of trial companies (Times).