"Help for first-time buyers"?

Here’s another example of how the main political parties are ignoring the notion of tax incidence - stamp duty. The Tories say they will:

Help first-time buyers get on the housing ladder, by increasing the stamp duty threshold to £250,000, so that nine out of ten first-time buyers will pay no stamp duty.

Labour agrees, except that it promises that the policy will apply for only two years.
Let’s leave aside the fact that this applies not to first-time buyers alone, but to anyone buying a house under £250,000. The question is: would these buyers really benefit from this exemption?
Not necessarily. It’s possible in theory that the absence of a tax on house purchases will lead to higher house prices. If so, what buyers gain from the tax break they lose from having to pay a higher price. In this case, the beneficiaries will not be first-time buyers at all, but home-owners for whom their house is net wealth.
The key facts that determine whether this will happen or not are the price elasticities of supply and demand. As a general rule, it is the most inelastic side of the market that benefits most from a tax break.
Which raises a puzzle. In the housing market, both supply and demand are inelastic. We know demand is price-inelastic, because in the mid-00s folk kept buying houses even after their prices had soared. And supply is inelastic too; if it hadn’t been, the boom of the 00s would have been choked off as higher prices caused lots of homes to come onto the market. These casual observations suggest the benefit of the tax break will be split between buyers and sellers.
However, three pieces of evidence suggest that buyers won’t benefit much from the break:
1. The stamp duty holiday last year led to house prices rising surprisingly quickly. This, though, mightn’t be conclusive. People thought the holiday was only temporary. This caused demand to be price-elastic, because prospective buyers pulled forward their purchases from the future. This won’t happen for a permanent tax break, so demand is likely to be more inelastic and prices are less likely to rise.
2. The evidence from the stock market is that stamp duty is capitalized in prices. However, it doesn’t follow that the same is true for the housing market, as demand and supply elasticities might be different.
3. Australian evidence, however, suggests they are not. A paper (pdf) by Andrew Leigh has found that:

The economic incidence of the tax is entirely on the seller; that is, prices fall by the full amount of the tax.

This suggests that the stamp duty break might not benefit buyers at all. Instead, maybe house prices will rise.
Now, I don’t say this to claim that this is what will happen; maybe our housing market differs from Australia‘s in important respects. Nor do  I much care if it does. What I am saying, though, is that to present a stamp duty cut as “help for first time buyers”  without analysis of the incidence of the cut is either stupid or dishonest.

Comments

[Prateekbuch]

If the idea is to help out first time buyers, why on Earth wouldn't you just build more houses or refurbish/renovate old ones, selling them for around £120k...?

[Leigh Caldwell]

Because that would hurt retiring homeowners when they trade down, of course! This is politics, we want a free lunch.

Not incidentally, homeowners close to retirement have a higher propensity to vote than likely first-time buyers. And there are more of them.

The best way, of course, to boost the value of existing homes is to encourage more inward migration. No doubt we will hear all the major parties promoting that idea over the next three weeks...

[Matt]

Isn't it also the case that if it goes on the house price you can usually load it on the mortgage, whereas stamp duty has to be paid in cash. Which is a pain, although I'm not sure 'encouraging bigger mortgages' would be a good campaign slogan.

[patrick]

Don't know if you saw Mark Easton's recent article, but he asked each of the main parties whether they thought it would be better for the country if house prices rose or fell.

Not one of them deigned to answer this simple question (not even to offer the obvious get-out of saying they were in favour of price stability.) I think that tells us something about how open and honest the political parties intend to be about this issue.

[Econoclast]

Let's be honest with ourselves. Neither political party has much interest in helping first-time buyers. Governments of both stripes have encouraged middle-income households to borrow excessively, bidding up house prices and effecting a massive transfer of wealth from the young to the old. Given the old are more likely to vote, why would you care about the young? The fact that this policy reached its peak under a Labour government - and that same government implemented massive policy interventions to support house prices - is a damning indictment of our sense of social justice. All homeowners are complicit in this disgraceful charade.

[[email protected]]

Housing has been turned into a free market for far too long.

The things that limit markets are supply issues - and finance.

Affordability has already outstripped supply.

Why because there is not finite space on a small island.

So either we build all over the green space we have left or we begin to limit the market.

Stopping people buying more than 2 houses to live-in this will suppress costs significantly.

Will it hurt people retiring possibly - but all you are doing is passing the suffering onto a younger generation.

Money will soon find something else to invest in - it always does - whether it be tulips or pension funds.

[Ethan]

Well, almost six months on and the first-time buyers market seems to have slumped further into decline. The prevailing faction appears to reside with the excessive deposits required by lenders responding to increased legislation as opposed to stamp duty though.

[real estate]

The problem with real estate is that you can't really put any restrictions on buyers nor sellers, because it's a free market owned by private investors. This is a worldwide issue. in some countries such as the US and Germany there are districts in which there is supervision on rental prices, but not much more than that...The problem is that prices keep ascending, and one day, like in the states, the bubble will burst and then everyone will suffer (not just first time buyers or retiring house-owners)

[chris Pia]

Interesting article, I am not sure how I came across an real estate article, but interesting read.