By David Smith
With some people arguing that we have not yet got through the bust, thoughts are already turning to how to stop the next house-price boom. Adam Posen, a member of the Bank of England’s monetary policy committee, argued last week that interest rates alone would not be enough to stop prices from getting out of hand in the future.
One way to do so, he suggested, would be to vary housing taxes according to the economy’s position in the cycle. So, when prices are rising too strongly, stamp duty should rise to deter buyers. Other taxes could also be used to cool over-exuberance. When the market slows and prices fall, such levies could be cut. We have, of course, seen a stamp-duty holiday on properties below £175,000 during this recession.
Could such a variable tax work? There is a month of data to go, and anything could happen, but it seems clear that on the Nationwide Building Society’s measure, house prices will end the year higher than they started. Prices rose by 0.5% last month, up 8.3% on their February low and 2.7% on a year earlier. Because prices fell sharply in December last year, even a flat figure this month would ensure that prices end 2009 more than 5% higher.
This was not in the script. At the end of 2008, house prices were falling at such a pace that few saw them stabilising, let alone recovering. The average prediction was for a 10% drop in prices during 2009, and several leading forecasters predicted a 20% fall.
This year’s experience shows how hard it could be to set a variable tax. Triggering an increase in duty each time, say, house-price inflation went above 10% would be fraught with difficulty, although we should not reject the suggestion out of hand.
Posen’s proposal was not the only tax idea doing the rounds last week. The Liberal Democrats modified their “mansion tax”, which would now apply only to homes worth more than £2m. Taxes, as we all know, will be going up in the next parliament, whoever wins the next election. And that in itself may be enough to cool any boom.
More than one in three tenants expect their rent to rise in the next year, according to a consumer-confidence survey conducted by Rightmove. The website also found that, of the 35,000 people questioned, almost two in three were renting only because they could not afford to buy. (David Smith, The Sunday Times).
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