Finally, finally at least one of the commentators beating the drum for stamp duty cuts has admitted what every first year economics student would know: that cutting stamp duties will in all liklihood drive house prices up.
Marc Coleman, who has made it his mission to turn stamp duties into an election issue, has finally admitted the inflationary dangers of cutting such duties. But in the process he has made some comments that are truly sublime.
Even if, as is likely, a reduction in stamp duty leads to price increases, this can only benefit both buyers and sellers. Sure, instead of paying stamp duty, buyers will end up paying a higher price for the house. But whereas the stamp duty goes to the Government, buyers will at least retain any price increment arising from its reform in the form of housing equity.
Let’s take a moment to fully appreciate this logic. People should not be overly worried about rising house prices and borrowing more because at the end of the day they will be purchasing more equity. Well, of course they will be buying more equity. Houses are more expensive. If houses weren’t so expensive, they would be buying the same house but at a lower price, hence less equity. To suggest that people should be grateful for paying higher prices and going further into debt shows just how many hoops some commentators will jump through to justify their tax-cutting agenda.
But Mr. Coleman isn’t finished hoop-hopping. He goes on to suggest that cuts in stamp duties will only result in ‘temporary’ price increases.
A softening housing market presents the best opportunity for the side-effects of reform – a temporary price increase – to be absorbed.
Temporary? Absorbed? Side-effects? The historical evidence is instructive. Between 2001 and 2004 second-hand house prices in Dublin increased by €45,000, €51,000 and €49,000 respectively. In 2005, following the stamp duty cuts in the budget, house prices increased by €72,000. Was this rise due to the stamp duty cuts? Probably. Certainly estate agents reported that people, by virtue of paying less duty, had more money in their pocket to bid on houses. It makes sense, certainly in the case where demand outstrips supply.
So was this above-average increase ‘temporary’? Well, in the first quarter of 2005, immediately after the stamp duty cuts, second-hand houses in Dublin averaged €403,000. By the second quarter of this year they had increased by over 25%: average prices stand at €516,000. No temporary there. And who does the absorbing? Vendors, estate agents, conveyancing solicitors: they absorb the extra money that first-time buyers have to pay out. And if the side-effects cancel out the softening, well at least Mr. Coleman can say ‘mission accomplished’.
We don’t expect Mr. Coleman to acknowledge that stamp duty cuts would be wholly regressive, has been done before with no positive effect, or that the real problem is the operation of the housing market itself (when the cost of building a house is half the sale price and less, something’s amiss). But we should at least expect a sense of economic logic and a bit of historical evidence to validate his claims.
Fortunately, we have economists who try to deal with the real world. Dermot O’Leary of Goodbody Stockbrokers has pointed that stamp duty cuts may well be the last thing the housing market and the economy needs:
With the predicted and indeed welcome ‘soft landing’ in the residential property sector, interference with stamp duty at this point could have a detrimental effect on market forces by falsely stimulating the market in the short term, leading to a harder landing in the medium term.
In similar vein, he suggests that cutting the top rate of tax in the context of an expansionary economy wouldn’t be a wise thing either (never mind the implications for tax and social equity).
Maybe Mr. O’Leary and others are saying things that some people don’t want to hear because it exposes their abstracted world of ‘perfect’ competition, ‘free’ markets, and the mystical ‘invisible hand’ of resource allocation. Good. We need more analysis grounded in the way things actually happen. There will still be room for disagreement and debate – after all, it is ultimately political debate – but at least we will be better informed.
In that respect, Mr. Coleman is not of much help.
Notes on the Front 
Leave a reply to Lorenzo Cancel reply