The housing market was at the heart of the 2014 Autumn Statement. Perhaps most eyecatching were the reforms to stamp duty. Stamp Duty is a tax on house purchases. Overnight we have seen the introduction of a graduated system of tax, along the lines of the income tax system – similar to the model to be adopted in Scotland from next April under the Land and Buildings Transactions Tax. For the rest of the UK, there will be five tax bands, including a zero rate band for property values up to £125,000. The total tax liability will be dependent upon the proportion of the value of the property that falls in each taxable band.
But, alongside the Stamp Duty announcement, the Autumn Statement was noteworthy for its references to new build. New build is clearly central to UK housing policy.
The Autumn Statement reaffirmed the government’s wish to see house building play a central role in easing pressures on the housing market. Over the past 40 years or more UK house prices have been characterised by considerable volatility and by a significant real increase. This can be seen clearly in the chart. 
Actual (nominal) house prices across the UK have grown an average rate of 10 per cent per year. Even if we strip out the effect of economy-wide inflation, we are still left with an increase of around 3.5 per cent per year. (Click here to download a PowerPoint of the chart).
The economics point to supply-side problems that mean demand pressures feed directly into house prices. The commitment to build has now seen the announcement of a new garden city near Bicester in Oxfordshire. This is set to provide 13,000 or more new homes. The government has also pledged £100 million to the Ebbsfleet Garden City project to provide the infrastructure and land remediation necessary to bring in more private-sector developers to help deliver an expected 15,000 new homes.
An interesting development in housing policy is the willingness of government to consider being more actively involved itself in house building. The development of former barracks at Northstowe in Cambridgeshire will be spearheaded by the Homes and Communities Agency which will lead on the planning and construction of up to 10,000 new homes. This signals, at least on paper, that government is prepared to think more broadly about the way in which it works with the private sector in helping to deliver new homes.
The desire to facilitate new build appears to make some economic sense. But, the politics of delivering on new homes is considerably more difficult since the prospect of new developments naturally raises considerable local concerns. Furthermore, it does not deal with fundamental questions around the existing housing market stock. In particular, how we can further increase investment in our existing housing stock, especially given the significant land constraints that face a country like the UK. As yet, the debate around how to improve what we already have has not really taken place.
Autumn Statement
Autumn Statement: documents Gov.UK
Articles
Autumn Statement: Government will build tens of thousands of new homes Independent, Nigel Morris (2/12/14)
Government could build and sell new homes on public sector land Guardian, Patrick Wintour (2/12/14)
Bicester chosen as new garden city with 13,000 homes BBC News, (2/12/14)
Nick Clegg reveals coalition plan for new garden city in Oxfordshire Guardian, (2/12/14)
State to build new homes for first time in generation Telegraph, Steven Swinford (2/12/14)
Data
House Price Indices: Data Tables Office for National Statistics
Questions
- Explain the distinction between real and nominal house prices.
- Would you expect real house price inflation to always be less than nominal house price inflation?
- What factors are likely to affect housing demand?
- What factors are likely to affect housing supply?
- Show using a demand-supply diagram the impact of rising incomes on the demand for a particular housing market characterised by a price inelastic supply.
- Would we expect all housing markets to exhibit similar characteristics of housing demand and supply?
- What is the economic rationale for the government’s new build policy?
- What other measures could be introduced to try and alleviate the long-term pressure on real house prices?
- How might we go about assessing the affordability of housing?
- Would a policy which reduced for the stamp duty payment of most buyers help to curb inflationary pressures in the housing market? Explain your answer using a demand-supply diagram.
Over the past three months oil prices have been falling. From the beginning of September to the end of November Brent Crude has fallen by 30.8%: from $101.2 to a four-year low of $70.0 per barrel (see chart below: click here for a PowerPoint). The fall in price has been the result of changes in demand and supply.
As the eurozone, Japan, South America and other parts of the world have struggled to recover, so the demand for oil has been depressed. But supply has continued to expand as the USA and Canada have increased shale oil production through fracking. 
As far as OPEC is concerned, rather than cutting production, it decided at a meeting on 27 November to maintain the current target of 30 million barrels a day.
The videos and articles linked below look at these demand and supply factors and what is likely to happen to oil prices over the coming months.
They also look at the winners and losers. Although falling prices are likely in general to benefit oil importing countries and harm oil exporting ones, it is not as simple as that. The lower prices could help boost recovery and that could help to halt the oil price fall and be of benefit to the oil exporting countries. But if prices stay low for long enough, this could lower inflation and even cause deflation (in the sense of falling prices) in many countries. This, in turn, could dampen demand (see the blog post, Deflation danger). This is a particular problem in Japan and the eurozone.
Major oil importing developing countries, such as China and India, however, should see a boost to growth from the lower oil prices.
Some oil exporting countries will be harder hit than others. Russia, in particular, has been badly affected, especially as it is also suffering from the economic sanctions imposed by Western governments in response to the situation in Ukraine. The rouble has fallen by some 32% this year against the US dollar and nearly 23% in the past three months alone.
Then there are the environmental effects. Cheaper oil puts less pressure on companies and governments to invest in renewable sources of energy. And then there are the direct effects on the environment of fracking itself – something increasingly being debated in the UK as well as in the USA and Canada.
Videos
Oil price at four-year low as Opec meets BBC News, Mark Lobel (27/11/14)
Opec losing control of oil prices due to US fracking BBC News, Nigel Cassidy (4/12/13)
How the price of oil is set – video explainer The Telegraph, Oliver Duggan (28/11/14)
How Oil’s Price Plunge Impacts Wall Street Bloomberg TV, Richard Mallinson (28/11/14)
Oil Prices Plummet: The Impact on Russia’s Economy Bloomberg TV, Martin Lindstrom (28/11/14)
Articles
Oil prices plunge after Opec meeting BBC News (28/11/14)
Crude oil prices extend losses Financial Times, Dave Shellock (28/11/14)
Oil price plunges after Opec split keeps output steady The Guardian, Terry Macalister and Graeme Wearden (27/11/14)
Falling oil prices: Who are the winners and losers? BBC News, Tim Bowler (17/10/14)Hooray for cheap oil BBC News, Robert Peston (1/12/14)
Russian Recession Risk at Record as Oil Price Saps Economy Bloomberg, Andre Tartar and Anna Andrianova (28/11/14)
Rouble falls as oil price hits five-year low BBC News (1/12/14)
Data
Brent Spot Price US Energy Information Administration (select daily, weekly, monthly or annual: can be downloaded to Excel)
Spot exchange rate of Russian rouble against the dollar Bank of England
Questions
- Use a diagram to illustrate the effects of changes in the demand and supply of oil on oil prices.
- How does the price elasticity of demand and supply of oil affect the magnitude of these price changes?
- Explain whether (a) the demand for and (b) the supply of oil are likely to be relatively elastic or relatively inelastic? How are these elasticities likely to change over time?
- Distinguish between the spot price and forward prices of oil? If the three-month forward price is below the spot price, what are the implications of this?
- Analyse who gains and who loses from the recent price falls.
- What are the effects of a falling rouble on the Russian economy?
- What are likely to be the effects of further falls in oil prices on the eurozone economy?
A big expenditure for many households is petrol. The price of petrol is affected by various factors, but the key determinant is what happens in the oil market. When oil prices rise, this pushes up the price of petrol at the pumps. But, when they fall, do petrol prices also fall? That is the question the government is asking.
The price of oil is a key cost of production for companies providing petrol and so when oil prices rise, it shifts the supply curve up to the left and hence prices begin to increase. We also see supply issues developing with political turmoil, fears of war and disruption and they have a similar effect. As such, it is unsurprising that petrol prices rise with concern of supply and rising costs. But, what happens when the opposite occurs? Oil prices have fallen significantly: by a quarter. Yet, prices at the pump have fallen by around 6%. This has caused anger amongst customers and the government is now urging petrol retailers to pass their cost savings from a lower price of oil onto customers. Danny Alexander, Chief Secretary to the Treasury said:
“I believe it’s called the rocket-and-feather effect. The public have a suspicion that when the price of oil rises, pump prices go up like a rocket. But when the price of oil falls, pump prices drift down like a feather … This has been investigated before and no conclusive evidence was found. But even if there were a suspicion it could be true this time it would be an outrage.”
However, critics suggest that tax policy is partly to blame as 63% of the cost of petrol is in the form taxation through fuel duty and VAT. Therefore even if oil prices do fall, the bulk of the price we pay at the pumps is made up of tax revenue for the government. Professor Stephen Glaister, director of the RAC Foundation said:
“It’s a simple story. Before tax we have just about the cheapest petrol and diesel in Europe. After tax we have just about the most expensive … It’s right to keep the pressure on fuel retailers but if drivers want to know what’s behind the high pump prices of recent years all they have to do is follow the trail back to the Treasury … if ministers are serious about reducing fuel prices further then they should cut duty further.”
(Click here for a PowerPoint of the chart.)
However, even taking out the fuel duty and VAT, Arthur Renshaw, an analyst at Experian has said that the actual price of petrol has fallen by 21% since last year. Still, a much bigger decrease than we have seen at the pumps. One further reason for this may be the fact that dollars is the currency in which oil is traded. The pound has been relatively weak, falling by almost 7% over the past few months and hence even though the price of oil has fallen, the effect on UK consumers has been less pronounced.
The big supermarkets have responded to government calls to cut petrol prices, but how much of this cut was influenced by the government and how much was influenced by the actions of the other supermarkets is another story. A typical oligopoly, where interdependence is key, price wars are a constant feature, so even if one supermarket cut petrol prices, this would force others to respond in kind. If such price wars continue, further price cuts may emerge. Furthermore, with oil production still at such high levels, this market may continue to put downward pressure on petrol prices. Certainly good news for consumers – we now just have to wait to see how long it lasts, with key oil producing countries, such as Russia taking a big hit. The following articles consider this story.
Articles
Supermarkets cut fuel prices again The Telegraph, Nick Collins (6/11/14)
Petrol retailers urged to cut prices in line with falling oil costs The Guardian, Terry Macalister (6/11/14)
Supermarkets cut petrol prices after chancellor’s criticism Financial Times, Michael Kavanagh (6/11/14)
Governent ‘watching petrol firms’ Mail Online (6/11/14)
Our horrendous tax rates are the real reason why petrol is still so expensive The Telegraph, Allister Heath (6/11/14)
Osborne ‘expects’ fuel price drop after fall in oil price BBC News (6/11/14)
Danny Alexander tells fuel suppliers to pass on oil price cuts to drivers The Telegraph, Peter Dominiczak (5/11/14)
Further UK fuel cuts expected as pound strengthens The Scotsman, Alastair Dalton (6/11/14)
Data
Spot oil prices Energy Information Administration
Weekly European Brent Spot Price Energy Information Administration (Note: you can also select daily, monthly or annual.)
Annual Statistical Bulletin OPEC
Questions
- Using a supply and demand diagram, illustrate the impact that a fall in the price of oil should have on the price of petrol.
- What is the impact of a tax on petrol?
- Why is petrol a market that is so heavily taxed? You should think about the incidence of taxation in your answer.
- Why does the strength of the pound have an impact on petrol prices in the UK and how much of the oil price is passed onto customers at the pumps?
- Does the structure of the supermarket industry help customers when it comes to the price of petrol? Explain your answer.
- Militant action in some key oil producing countries has caused fears of oil disruption. Why is that oil prices don’t reflect these very big concerns?
One of the key battle grounds at the next General Election is undoubtedly going to be immigration. A topic that is very closely related to EU membership and what can be done to limit the number of people coming to the UK. One side of the argument is that immigrants coming into the UK boost growth and add to the strength of the economy. The other side is that once in the UK, immigrants don’t move into work and end up taking more from the welfare state than they give to it through taxation.
A new report produced by University College London’s Centre for Research and Analysis of Migration has found that the effect on the UK economy of immigrants from the 10 countries that joined the EU from 2004 has been positive. In the years until 2011, it has been found that these immigrants contributed £4.96 billion more in taxes than they took out in benefits and use of public services. Christian Dustmann, one of the authors of this report said:
“Our new analysis draws a positive picture of the overall fiscal contribution made by recent immigrant cohorts, particularly of immigrants arriving from the EU … European immigrants, particularly, both from the new accession countries and the rest of the European Union, make the most substantial contributions … This is mainly down to their higher average labour market participation compared with natives and their lower receipt of welfare benefits.”
The report also found that in the 11 years to 2011, migrants from these 10 EU countries were 43 per cent less likely than native Britons to receive benefits or tax credits, and 7 per cent less likely to live in social housing. This type of data suggests a positive overall contribution from EU immigration. However, critics have said that it doesn’t paint an accurate picture. Sir Andrew Green, Chairman of Migration Watch commented on the choice of dates, saying:
“If you take all EU migration including those who arrived before 2001 what you find is this: you find by the end of the period they are making a negative contribution and increasingly so … And the reason is that if you take a group of people while they’re young fit and healthy they’re not going to be very expensive but if you take them over a longer period they will be.”
However, the report is not all positive about the effects of immigration. When considering the impact on the economy of migrants from outside of the EEA, the picture is quite different. Over the past 17 years, immigration has cost the UK economy approximately £120bn, through migrant’s greater consumption of public benefits, such as the NHS, compared to their contributions through taxation. The debate is likely to continue and this report will certainly be used by both sides of the argument as evidence that (a) no change in immigration policy is needed and (b) a major change is needed to immigration policy. The following articles consider this report.
Report
The Fiscal effects of immigration to the UK The Economic Journal, University College London’s Centre for Research and Analysis of Migration, Christian Dustmann and Tommaso Frattini (November 2014)
Articles
Immigration from outside Europe ‘cost £120 billion’ The Telegraph, David Barrett (5/11/14)
New EU members add £5bn to UK says Research BBC News (5/11/14)
UK gains £20bn from European migrants, UCL economists reveal The Guardian, Alan Travis (5/11/14)
EU immigrant tax gain revealed Mail Online (5/11/14)
Immigration question still open BBC News, Robert Peston (5/11/14)
EU migrants pay £20bn more in taxes than they receive Financial Times, Helen Warrell (5/11/14)
Questions
- Why is immigration such a political topic?
- How are UK labour markets be affected by immigration? Use a demand and supply diagram to illustrate the effect.
- Based on your answer to question 2, explain why some people are concerned about the impact of immigration on UK jobs.
- What is the economic argument in favour of allowing immigration to continue?
- What policy changes could be recommended to restrict the levels of immigration from outside the EEA, but to continue to allow immigration from EU countries?
- If EU migrants are well educated, does that have a positive or negative impact on UK workers, finances and the economy?
The housing market and what to do about bubbles, second homes and first time buyers is likely to be one of many battle grounds at the next election. For many years, the idea of a mansion tax has been debated and the Shadow Chancellor, Ed Balls, has outlined plans for a mansion tax under a Labour government.
The policy would see houses valued at between £2 and £3 million pay £250 a month as a mansion tax. Those owning a home worth tens of millions and those with second homes would pay more under the mansion tax, which would be based on a progressive system. Concerns have been raised about the impact of this tax on home-owners in areas like London, where average house prices are considerably higher than the UK average. Ed Balls has sought to reassure homeowners that payment of the mansion tax could be deferred if earnings do not reach the £42,000 threshold. However, critics have suggested that this policy will only make things worse for middle income households who will not be able to defer such a payment if their income is £43,000. Labour’s MP for Greenwich, Nick Raynsford said, ‘What it does is create a cliff edge. It will still hit people who are asset rich but cash poor.” Writing in the Evening Standard, Ed Balls said:
“Long-standing residents who now find themselves living in high-value homes but do not have an income high enough to pay the higher or top rate of income tax — in other words earn less than £42,000 a year — will be guaranteed the right to defer the charge until the property changes hands.
So a tax on the highest value properties will be done fairly and carefully to help fund our NHS for the future.
Ordinary Londoners should be protected and wealthy foreign investors must finally make a proper tax contribution in this country.”
Although similar in its objective to the Liberal Democrat’s mansion tax, the amount of the tax as a percentage of the value of the home under Labour is significantly lower. It is likely to be between 0.1% and 0.15% of the home’s valued, compared to the 1% levy proposed by the Liberal Democrats.
One debate now surrounds the amount that this tax is expected to raise, especially given the revenue has been ear-marked to finance the NHS. The number of homes whose value is estimated to fall between £2m and £3m varies considerably and hence so would the revenues raised from such a tax. However, the income generated by even the most generous estimates will not come close to raising the ear-marked figure of £1.2bn. As such, there are suggestions that the tax levied on houses worth more than £3m; on foreign owners of residences in the UK and second homes will need to be significant to make up the short fall. A spokesperson for the Conservatives said:
“Serious questions have now been raised about how much revenue Labour would be able to raise from the tax …This is a further unravelling of the policy, which faced fierce criticism after it was revealed that no money would be raised until halfway through the next parliament, and the proposals for mass valuations of family homes was widely slammed as unworkable.”
The UK residential research director of Savills estate agency, Lucian Cook, added:
“Given Labour’s stated ambition to raise £1.2bn, that would leave at least £1.08bn to be raised from the remaining 57,000 properties, possibly more to account for tax leakage elsewhere in the system.”
The impact of the mansion tax will depend on exactly how it is imposed and the thresholds, together with how the threshold changes with the housing market. In the UK, we have seen some houses increase in value by huge amounts in just a few months and with a mansion tax, any such increase in price could move more home-owners into the new progressive tax system. Some argue that it is a tax on Londoners. The following articles consider the proposed policy by Labour.
Ed Balls seeks to reassure London home owners over mansion tax plans The Guardian, Patrick Wintour (20/10/14)
Ed Balls: Mansion tax would start at £250 a month BBC News (20/10/14)
‘Mansion tax’ will mean bill of £250 a month, says Ed Balls Financial Times, Emily Cadman, Kate Allen, Vanessa Houlder and George Parker (20/10/14)
Mansion tax can be deferred in you earn less than £42,000, Ed Balls insists as he reveals details of levy on £2million homes Mail Online, Matt Chorley (20/10/14)
Ed Balls: Mansion tax will cost homeowners £250 a month London Evening Standard (20/10/14)
Middle-class families hit by Labour’s mansion tax The Telegraph, Steven Swinford (20/10/14)
Balls says mansion-tax threshold to rise with home values Bloomberg, Svenja O’Donnell (20/10/14)
Questions
- How does a progressive tax system work?/li>
- Why are some critics arguing that this mansion tax would just be a tax on Londoners?
- What objective is the £42,000 income threshold trying to achieve? Do you think that critics are correct in their assertion that it penalises middle income households?
- Fiscal drag is mentioned in the BBC News article as a potential problem with the mansion tax proposed by Labour and that houses may move into the taxable threshold. What is fiscal drag and why is it a potential concern?
- How might such a policy affect the incentives of foreigners to invest in the UK housing market? Would this be a good or a bad thing and for who?
- The revenues generated from houses between £2 and £3m will not be sufficient to generate £1.2bn. What are the implications for how progressive the mansion tax would need to be and how this might affect homeowners?
An interesting development in housing policy is the willingness of government to consider being more actively involved itself in house building. The development of former barracks at Northstowe in Cambridgeshire will be spearheaded by the Homes and Communities Agency which will lead on the planning and construction of up to 10,000 new homes. This signals, at least on paper, that government is prepared to think more broadly about the way in which it works with the private sector in helping to deliver new homes.
