An independent think tank has called on the Government to increase taxes on homeowners in a bid to reduce house price volatility.

The Social Market Foundation said the Government should impose a Capital Gains Tax of about 40 per cent on any profit people made on their property through house price rises and even an annual tax of a proportion of a property's value.

The group said one of the reasons for volatility in the housing market was a shortage of supply.

It said the shortage was partly caused by the fact that as prices went up people had very little incentive to sell their property as if they held on to it they could make more money.

But it said an annual property tax could encourage them to sell, because as the value of their property went up so would their tax bill.

At the same time, if the Chancellor took a 40 per cent slice of any profits people made, this would reduce the money they had available to buy their next house with, making it harder for people to keep chasing prices up.

The group added the volatile property market also contributed to low levels of house building as builders were unsure what house prices would be doing when they were ready to sell properties, which in turn exacerbated supply problems.

The author of the report, Tom Startup, said: "The only truly effective means for tackling this problem is to increase the taxation of homeowners, bringing it into line with the treatment of private landlords.

"Capital Gains Tax on home-ownership and an annual property tax proportional to the market value of the property would be necessary to reduce volatility and restore building levels."

He said the new taxes could be offset by decreasing or even abolishing council tax or stamp duty if necessary.

He said: "Treasury economists have long accepted the merit of these reforms. And the Chancellor now realises that reform of the housing market is necessary for macroeconomic stability and entry to the euro."

Tuesday June 24, 2003