Stamp duty holiday not the main cause of house price boom

While many have suggested the stamp duty holiday was the main force behind the pandemic-defying rise in house prices across the past year, new Resolution Foundation research published today (Saturday) suggests its role has been overstated, with other factors playing an equal, if not more important, role.

The Foundation’s quarterly Housing Outlook examines the recent house price boom – the average value of a UK home increased by 13.2 per cent between June 2020 and June 2021 – and the common assertion that it was principally caused by the transaction tax holidays introduced across all UK nations in summer 2020. These included the ongoing stamp duty holiday in England and Northern Ireland, due to be phased out at the end of September, and already-ended transaction tax holidays in Scotland and Wales.

However, today’s Outlook suggests that higher savings, changes in housing preferences, and falls in mortgage rates would have likely led to significant price rises in the absence of a stamp duty holiday.

The report says that, if cuts to transaction taxes were driving the house price trends of the last 12 months, we would expect to see higher growth in areas where the savings from the policy change were most significant.

In England homes priced around £500,000 have seen the biggest transaction tax savings relative to price, while in Scotland and Wales those worth £250,000 were most affected – and this is where the sharpest stimulus was expected.

Instead, in the last year, prices grew 13 per cent in the fifth of local authorities where savings as a result of a transaction tax holiday were negligible or non-existent, compared to 7 per cent in the fifth of local authorities where the highest savings were achieved.

In addition, the Foundation says, areas where the savings from the transaction tax holidays have been most significant have been no more likely to see an increase in transactions than those where the gains have been small, except immediately around deadlines for tax breaks to end.

Similar – and in many cases greater – house price growth also took place across the same period in Germany, the United States, Canada and Australia and France. These trends demonstrate that it is shared factors such as historically low interest rates, increased savings and changing preferences – with more people opting for larger, detached homes in areas away from city centres – that are the principal drivers of surging prices.

The Foundation concludes that criticism of the stamp duty holiday for causing the house price boom is wide of the mark. Critics should instead focus on the fact that it was both expensive and unnecessary. In England and Northern Ireland alone, the stamp duty holiday looks set to cost an estimated £4.7 billion in forgone taxes by the end of 2021/22.

Krishan Shah, Researcher at the Resolution Foundation, said:

“UK house prices have boomed over the past year, and many have pointed the finger at the stamp duty holiday as the main cause. But the evidence doesn’t support this popular claim. It now seems that other factors, such as higher savings and changing housing preferences, may have been more or equally important.

“The problem with the stamp duty holiday isn’t that it caused a house price rise, but that a boom in transactions and prices would almost certainly have taken place without it. That begs big questions about value for money, especially when we consider that the policy in England and Northern Ireland alone looks set to cost an estimated £4.7 billion in forgone tax revenues.

“We must also remember that, regardless of its drivers, the house price surge of the last year has increased wealth gaps in our country and left many aspirant first-time buyers even further away from realising their ambitions of owning a home.”