In any normal year the UK housing market has two distinct periods of activity – spring and autumn. However, this year it is neatly broken down into four calendar quarters, with transaction numbers higher in 2021 than any other year due to the impact of the stamp duty holidays.
In an effort to boost the economy through the pandemic, the maximum postage saving will decrease from £ 15,000 from the end of this month to £ 2,500 in September. So far, its impact has been considerable.
Tom Bill, Head of UK Residential Research at Knight Frank, explains how this year will be a case study of how different stamp tax rates affect the real estate market.
There was a false start to a stamp tax vacation in the first quarter, which was postponed four weeks before it expired at the end of March. The second quarter of June will mark the end of the holidays for many, while the third quarter will see the interest rate go away in September. There will be no vacation during the last quarter.
UK transaction numbers hit record levels in March, the month of the false start, pushing total annual real estate spending to levels not seen since the global financial crisis. The up-to-date sales took place anyway, despite the March 3rd announcement that the end of the holidays would be postponed.
Transaction numbers then fell 36% in April, according to preliminary HMRC data. It was the third largest monthly decline on record, despite following a deadline that ultimately did not occur. The largest monthly decline was seen in April 2020 when the country entered its first national lockdown. The second largest decrease was in April 2016, the month in which a stamp tax surcharge of 3% was introduced for second home owners and landlords. The fourth largest drop was in January 2010 after the end of an earlier stamp duty vacation.
The impact of stamp duty on transaction numbers is clear. In fact, there are parallels between 2016 and 2021, with both years seeing an increase in March, followed by a decrease in April, as the graph below shows. Before the stamp duty expires on June 30th, there is every reason to believe there will be a second big surge in transactions this month.
One lesson from 2016 to keep in mind when trying to anticipate what will happen when the holidays are over is that tax deadlines can put off potential sellers, some of whom will wait for market conditions to normalize.
In the ten years between 2009 and 2019, the number of market valuations fell only once between February and March – in 2016. Valuations, which are an early indicator of new offerings, are usually created in the first quarter of the year. While the average monthly increase between February and March was 13% over the decade, there was a decrease of 15% in 2016.
This hesitation partly explains the supply and demand imbalance that has been a feature of the UK property market this year.
Knight Frank has analyzed this in more detail here and here and was highlighted in the RICS monthly poll last week. The end of the stamp duty holidays is one reason why the supply should build up this year and house price inflation should rise again in the single-digit range.
It is a safe conclusion that there will be fewer transactions in July than in June. However, the extent of any decline in the third quarter is mitigated by the fact that fewer people are vacationing overseas this summer, as well as other regional factors that we will explore in more detail in the future.
Only in the fourth quarter will the monthly fluctuations in the number of transactions be significantly less dramatic, barring unforeseen events.