Stamp duty holiday turning out to be a mistake - Capital Economics
UK Housing

Stamp duty holiday turning out to be a mistake

UK Housing Market Update
Written by Andrew Wishart

With the benefit of hindsight, the stamp duty holiday was not necessary to get the housing market moving again. And the end of the holiday in March will insert a cliff edge in demand at the exact moment we expect employment and incomes to be suffering most. If it is not extended, that’s another reason to think the surge in transactions and prices this year will be reversed in 2021.

  • With the benefit of hindsight, the stamp duty holiday was not necessary to get the housing market moving again. And the end of the holiday in March will insert a cliff edge in demand at the exact moment we expect employment and incomes to be suffering most. If it is not extended, that’s another reason to think the surge in transactions and prices this year will be reversed in 2021.
  • On 8th July the Chancellor raised the 0% stamp duty band threshold from £125,000 to £500,000 until 31st March 2021. Previously the slice of the value of the home from £125,000 to £250,000 attracted a 2% fee and from £250,000 to £950,000 a 5% fee. So home purchasers can save up to £15,000.
  • Since the cut, housing market activity has shot up to its highest level since 2007. But activity in other developed market housing markets is also booming, suggesting the tax cut is not the only reason for the resurgence in the UK. Pent up demand from the first lockdown, a reassessment of location and space due to home working, a decline in mortgage interest rates in the first half of the year, and the savings many households built up during lockdown have pushed up transactions elsewhere too. (See Chart 1 & here.)
  • That said, the design of the stamp duty cut has turbocharged the drivers of the 2020 housing market surge. On top of the usual effect of bringing demand forward from the future, it has encouraged home moves motivated by COVID-19. Raising the threshold to £500,000 means 90% of transactions attract zero stamp duty, including many large, detached houses that have seen the largest rises in prices since July. And as first-time buyers already get some stamp duty relief anyway, it has increased the incentive to move most for second steppers who may now need an extra room for home working or want outdoor space.
  • History can give us some idea of what impact the expiration of the cut will have. The temporary cut in 2008/9, when the 0% threshold was raised from £125,000 to £175,000, was much smaller. It made about 45% of transactions zero-rated compared to 90% now. Therefore, the boost, and subsequent slump, in activity will probably be bigger this time around. Indeed, we now think that when the cut expires transactions will fall almost as low as at the height of the first COVID-19 lockdown. (See Chart 2.)
  • The slump in demand is likely to coincide with a rise in forced sales as the ending of the furlough scheme brings a sharp rise in unemployment. (See here.) So the balance between buyer demand and seller instructions could shift sharply. There is growing evidence that those involved are recognising this. For instance, the balance of estate agents expecting prices to rise over the next year has already slipped from +27% in August to +8% in October. And banks have reduced the availability of high LTV mortgages and raised the interest rates on those that are still available, partly to mitigate a fall in house prices.
  • In hindsight the stamp duty cut looks like an expensive mistake. Indeed, the government may be forced to extend the holiday to avoid a damaging downturn. But with the government growing increasingly concerned about the fiscal cost of the crisis, it is at least likely become less generous. In any event, many buyers will have already brought forward a planned purchase. That raises the risk of a housing market correction next year.

Chart 1: Housing Transactions (Jan. 2019 = 100)

Chart 2: Transactions (000s)

Sources: Land Registry, Capital Economics

Sources: Refinitiv, Capital Economics


Andrew Wishart, Property Economist, +44 (0)7427 682 411, andrew.wishart@capitaleconomics.com