Stamp duty should be scrapped and replaced with a new property wealth tax to fix London’s housing crisis, a leading thinktank has proposed.

A report on the capital’s property market suggests an annual tax to replace the levy paid when buying a property and council tax would encourage downsizing and raise funds for social housing. It would also help renters to save a house deposit.

The research, by the Centre for London, highlighted disparities in space between the poorest and wealthiest homeowners. It found average floor space for each person rose by almost 30% between 2004 and 2023, but this additional space went disproportionately to higher-income owner-occupiers.

Households in the top 20% of incomes have seen a 27% rise in space owned, whereas the bottom 40% had a rise of 6%. This means that, despite London having more housing available to use for each person than 20 years ago, housing inequality has widened.

This is just one of the acute problems of London’s housing market described in the report: homelessness costs £5.5m a day and record numbers of Londoners are living in temporary accommodation.

House prices are 12 times earnings (up from seven in the early 2000s) and a third of children live in poverty after housing costs, the report finds. Businesses also say the unaffordability of housing is strangling growth, investment and talent.

“By every metric that matters, the housing crisis is at its worst,” said Rob Anderson, the director of research at the Centre for London and co-author of the report.

The paper outlines radical reforms, including scrapping stamp duty and council tax and replacing them with a partly devolved annual proportional property tax (PPT) that could pay for 106,000 social and affordable homes over the next decade.

Homeowners with the largest properties in the most expensive areas would pay the most tax under the proposed system. PPT would be calculated as a percentage of the value of the home. On those worth up to £800,000, the average base rate of 0.39% would apply. This rate rises on higher-value homes, with those worth up to £999,999 paying an additional 0.01% charge. Over £1m, an additional 0.02% increment is applied for every £200,000 up to a property value of £5m.

Under the proposals, a £500,000 home in band D in Greenwich would have an annual PPT rate of 0.39%, or £1,950, saving £15,302 in the first 10 years compared with council tax and stamp duty land tax (SDLT).

A £5m home in band H in Westminster would pay PPT at 0.82%, or £41,000, a year. In the first 10 years the owners would save £86,792 compared with council tax and SDLT.

Private and social renters would no longer pay council tax, saving the typical renter more than £1,890 a year. With no stamp duty, first-time buyers would save £8,593 across five years of ownership.

Those who are asset-rich but cash-poor, for example those downsizing whose homes have risen significantly in value, would be able to defer the transition to PPT for up to a decade and continue with council tax. The rest would be payable on the sale of the property.

“It is widely acknowledged by economists and politicians from different parties that stamp duty has a disruptive effect on the housing market and both stamp duty and council tax act as an incentive to hold on to property,” Anderson said.

“Removing stamp duty on ordinary movers [owner-occupiers moving into their primary home] would release an extra 79,000 homes a year, while raising funds for investment into social and affordable housing.”

The abolition of council tax (pegged to values from 1991) would also lift a weighty financial burden from renters, enabling them to more easily save for a deposit on their first home.

The Centre for London joins the pleas of the housebuilding sector to help first-time buyers save the deposit needed to buy a home in London – which was at an average of almost £150,000 for those buying without family assistance in 2024. House prices in London have risen by more than 200% since 2002.

Although “building more homes is a given”, the picture is far more complex, according to the Centre for London. “The problem cannot just be understood as a simple shortage in the number of homes,” Anderson added.

“London can build more homes and it must. But if housing policy only focuses on increasing headline supply numbers and beating delivery targets, we risk missing the real problem: a housing system which is not delivering enough homes overall.”