Soaring house prices are not down to the stamp duty tax relief, according to a recent report.
The Resolution Foundation, a leading independent think tank, argues there have been “stronger forces at play within the housing market over the past year” with pandemic-related factors such as enforced savings over lockdown, changing house preferences and low-interest rates as the real reason for continuing house price growth.
The report concludes that “the transaction tax holidays have been problematic less because they were inflationary, and more because they have been wasteful” resulting in the HMRC forgoing an estimated £4,7 billion in taxes across England and Northern Ireland.”
Introduced in +July 2020, the stamp duty break sought to stimulate economic activity by boosting transactions in the housing market, offsetting the expected effects of the pandemic.
Since this time, house prices have rocketed, with the average value of a UK home rising more than 13.2%. According to Halifax’s most recent House Price Index, the “average UK property price currently stands at £261,221, up 0.4% in July and Wales records strongest house price growth since 2005”.
Currently, the stamp duty holiday in England and Northern Ireland is being phased out, with the tax break set to elapse on 30 September 2021. The Scottish and Welsh stamp duty holidays have now ended on 31 March and 30 June, respectively.
For those buyers in England and Northern Ireland looking to purchase a property, the threshold at which stamp duty kicks in has dropped from £500,001 to £250,001 until the 30th September 2001, with scope for savings of up to £2500. The threshold will fall back to its usual level of £125,001 on 1st October 2021 unless you’re a first-time buyer where you’ll pay no SDLT up to £300,000.
Wide of the mark
Investigating whether the stamp duty break fuelled the recent house price boom, the Resolution Foundation’s analysis in the Housing Outlook reports to the contrary – “house prices have defied expectations over the last year, rising dramatically in the face of the Covid-19 economic crisis’ and ‘while many commentators have blamed transaction tax holidays for this trend, analysis in this housing Outlook suggests this is somewhat wide of the mark.”
The report’s authors Lindsay Judge, Felicia Odamtten and Krishan Shah acknowledge that “it is reasonable to expect at least part of the savings from any transaction tax holiday to be capitalised into house prices (an HMRC evaluation of the stamp duty cut introduced for first-time buyers in wake of the financial crisis estimated that between 50 and 70 per cent of the value fed through into higher house prices, for example.”
However “logically, if the cuts to transaction taxes have been the overwhelming driver of the house price trends observed over the past 12 months, we would expect to see higher growth in areas where the savings from the change in policy have been most significant as a share of the house price.”
The authors further found that “Prices have grown by more in those local authority areas where the average buyer experienced negligible, if any, savings as a result of a transaction tax holiday, compared with areas where far higher savings were achieved.”
The think tank went onto compare house price trajectories in five other developed economies over the pandemic period. It was noted that house prices also rose significantly over the past year signalling that the UK “are no outlier when it comes to recent house price performance.”
The findings further support the suggestion that “we should look more to common factors such as historically low-interest rates globally and changing housing preferences in the wake of the Covid-19 crisis for a large part of our explanation of recent trends.”
The report concludes by confirming “Overall, then, our critique of the transaction tax holidays nationwide (and certainly their extension in England, Northern Ireland and Wales in March 2021) is less that they have been the dominant force pushing up house prices over the past year, and more that they have not been required given other drivers of activity in the market.”