The fallout from the early release of the Office for Budget Responsibility (OBR) report and the resignation of its chair grabbed headlines. Yet buried within the report is a warning policymakers cannot afford to ignore –tinkering with housing taxes risks undermining both revenue and economic growth.
The aim of a functioning housing market is, and always should be, to provide homes for everyone. It also plays a critical role in supporting the economic growth the UK so badly needs. Last year alone, the housebuilding sector generated more than £50 billion in economic output. When policymakers intervene in this market, the ripple effects go far beyond housing.
The OBR’s analysis of the Chancellor’s proposed Higher-Value Council Tax Surcharge (HVCTS) illustrates this point. The surcharge, due to start in 2028, will apply to homes worth £2 million or more, with four bands rising to £5m+. Annual charges will range from £2,500 to £7,500, based on valuations set in 2026. The OBR outlined that this is expected to raise £600 million a year, so on paper the measure looks lucrative.
But in its more detailed calculations, it shows that the receipts for the Treasury will total only £400 million a year, as a third of the potential income from the move will be eroded by ‘direct behavioural effect’. In plain terms, homeowners will adjust pricing to avoid higher charges. For example, a home worth £2.49m will pay £2,500 a year, while a home valued at £2.51m will pay an extra £1,000 a year with a recurring surcharge of £3,500. These cliff edges encourage “bunching” just below thresholds, reducing surcharge revenue and depressing Stamp Duty and Capital Gains Tax receipts for properties bought and sold at these slightly lower values. In fact, the move is expected to cost the Treasury £300 million between 2026 and 2028, before the new charge even comes into force, as sellers adjust prices in anticipation.
Just as behaviour can affect tax receipts, taxes also affect behaviour, something that the OBR also flagged in its report. It said it expected 155,000 fewer housing transactions a year in 2029 compared to its March forecast, partly due to higher stamp duty rates.
Even discussions around taxes will affect behaviour and have a wider knock-on effect. Take the Budget itself, for example. This year’s was the most leaked in recent history, with stories about potential property tax changes emerging as early as August. In higher-value property markets, this was enough to stall activity. LonRes data shows that high-end property transactions in prime central London fell by 20% in Q3 compared to the same period last year. Overall stamp duty receipts were supported by slightly increased activity in the UK market and a surge in transactions in March ahead of the stamp duty threshold reductions in April. However, these receipts could have been even higher, and delivered more revenue to the Treasury, if the prime London market had not been stalled by rumours of tax changes, only some of which came to pass.
The lesson is clear. Policymakers agree the UK needs a fully functioning housing market that delivers quality, affordable homes, and which has a range of tenures to support labour mobility. But to achieve this, the policy landscape must be controlled and pulling in the same direction. The market values certainty and simplicity, as they are prerequisites for confidence, investment and growth. Complexity and uncertainty, by contrast, distort behaviour and erode revenue.
If the goal is a housing market that works for households and the economy, policymakers must resist the temptation to tinker. The market responds to signals – and when those signals are mixed, everyone pays the price.
