Will the Stamp Duty relief effect house prices?

Source: CML and Nationwide

The price of a typical UK property rose by a seasonally adjusted 0.7% month-on-month in March, largely reversing the 0.8% month-on-month fall measured in February. The smoother three month on three month rate of inflation edged down further from 1.8% in February to 1.6% in March. At £164,519, the average price of a typical property is 9.0% higher than a year earlier.

The last two months are consistent with a relatively flat profile for house prices, and in line with the recent drops seen in buyer enquiries and house sales. Preliminary figures show that the number of loans taken out for house purchases failed to recover from January’s large dip , suggesting that weakness in house sales at the start of the year may have been due to more than just the snowy weather.

With greater than usual political and economic uncertainty ahead of the up and coming election, potential buyers are proceeding cautiously. At the same time, the number of homes for sale has not increased appreciably, meaning that the impact of lower buyer activity on house prices has not been too negative. If this trend continues we are likely to see few properties change hands, but with prices fairly stable.

The Budget brought with it the surprise announcement that for the next two years, the nil stamp duty threshold will be raised from £125,000 to £250,000 for first-time buyers. Based on Nationwide’s sub-index for first-time buyers, this will produce a savings of £1,368 for the average new entrant into the property market. At a national level, the vast majority of first-time buyers should benefit from the holiday, though with the average London house price at £243,163 for first-time purchasers, a significant number of new buyers in the capital will miss out on the savings.

For first-time buyers, this initiative effectively represents a larger and longer version of the stamp duty holiday in place between September 2008 and the end of December 2009 for properties bought for less than £175,000. Looking back on the previous tax holiday, the evidence on its success in boosting transactions is mixed. Intuitively, one might expect a stamp duty holiday to boost total house purchase activity, with a disproportionately greater increase in transactions at the lower-priced end of the housing chain.

We of unfortunately do not know what the housing market  would have looked like without last year’s stamp duty holiday, and it may well be that the level of transactions would have stayed even lower for longer.

Undoubtedly this new measure will be welcome relief for aspiring first-time buyers. However, based on past experience it may not be enough on its own for the housing market to make a full recovery.

Over the course of the last holiday, there was indeed a modest increase in house purchase transactions, with most of the pick-up seen during the second half of the exemption period.

However, transactions remained well below normal levels throughout and it is not clear how much of the pickup was attributable to other factors such as the record cut in interest rates.

In addition, there was no appreciable increase in transactions at the lower end of the chain. The only exception to this was the last month of the holiday (December 2009), when buyers standing to benefit from the exemption rushed to complete their purchase before the end of the year. This rush to complete is similar to what happened during the stamp duty holiday introduced in the early 1990s housing downturn.