Are house prices stalling as Stamp Duty holiday begins to taper off?

The Halifax House Price Index for June 2021 has suggested that house prices were down 0.5% on May, prompting some commentators to wonder if this heralds a slowdown in the UK’s frantic housing market. If so, could this be due to the fact that the government’s Stamp Duty holiday is beginning to taper off, and can we expect to see house prices fall further over the coming months?

What has happened with Stamp Duty?

The Stamp Duty holiday was introduced in June 2020 as chancellor Rishi Sunak tried to get the housing market going again after the first lockdown. As with the 'Eat Out to Help Out' scheme that he devised for the hospitality industry, it worked rather more effectively than expected, sparking off a housing sales boom that's seen UK house prices rise nearly 9% in the space of a year. 

The essence of the scheme was that homebuyers wouldn't have to pay Stamp Duty Land Tax on the first £500,000 of their property purchase, saving them up to £15,000 on more expensive homes. At the time, the chancellor reckoned the average buyer would be £4,500 better off.

The Stamp Duty holiday was originally scheduled to run until 31 March 2021. As the deadline approached, however, conveyancing and administrative bottlenecks due to the sheer number of sales meant that a lot of people were going to miss out. Under pressure, Rishi Sunak announced that the Stamp Duty holiday would be extended, and would taper off gradually rather than coming abruptly to an end. 

From 1 July, Stamp Duty has begun to be payable at 5% on property purchases over £250,000, and from 1 October the original 2% rate for properties costing between £125,000 and £250,000 will come back in. 

Is this slight drop in house prices a sign of things to come?

Probably not. It’s quite possible that the 0.5% fall in property values is the result of people having rushed to get their property purchases through before the deadline, but the Stamp Duty holiday has been far from the only thing driving the housing boom.

At the heart of it are more fundamental questions about where people want to live, what sort of houses they want to live in, and how much of their income they’re prepared to spend on housing. The pandemic (and more to the point, the lockdowns), have brought these questions sharply into focus, prompting what some have called a ‘race for space’. Meanwhile, the phenomenon of ‘accidental saving’ has meant many people now have more money in their pockets than they did at the beginning of 2020, while low interest rates have made borrowing cheaper and given buyers more spending power. 

In this context, many experts are predicting further price rises over the coming months, particularly as the supply of attractive housing becomes scarcer.

Interestingly, it’s only the Halifax House Price Index that has recorded a drop. Nationwide – which conducts similar analysis – recorded a 0.7% monthly increase in June, which while not as impressive as other months still puts house prices on an upward trajectory. What’s more, the Nationwide report puts annual growth at 13.5% – the highest level since November 2004 

What might be in store for the housing market as the year goes on?

The big issue now is supply and demand, as the number of new properties coming onto the market fell by a third in June. With an ever more limited pool of properties on the market, buyers in certain areas are beginning to become desperate, bidding way over the odds and sometimes making offers on places they haven’t even been to look round.

Part of the problem is that everyone suddenly wants to live in larger houses in the countryside or suburbs rather than city-centre flats, and there simply aren’t enough of them around to satisfy the demand. Flats have become less attractive for a variety of reasons – chiefly the fact that they usually offer more limited space, but also the terrible mess of the cladding scandal and increasing awareness of the pitfalls of leasehold property purchases. Also there’s not been a great deal of point living in the heart of the city when everyone’s working from home and coronavirus measures have devastated the nightlife, hospitality and cultural sectors.

As long as these trends continue, the scarcity of desirable properties is liable to push people into making bold bids. It still remains to be seen how well the economy will recover from the impact of the pandemic – and any increase in interest rates could have a knock-on effect on house prices – but for the time being it seems likely that prices will continue to climb. In a recent survey, most members of the Royal Society of Chartered Surveyors (RCIS) said that they expected prices to keep on rising over the coming year

Of course, the big losers in all this are first-time buyers. In general, younger and lower-earning people have been hit harder by the pandemic, while at the same time watching house prices climb way out of their reach – to the point where renting has started to be cheaper than buying for the first time in years. This societal divide has led some commentators to warn of a ‘two-tier recovery’, and while the government hasn’t yet made significant moves to address this, they will need to sooner or later.