Since July 2020 the UK housing market has had some kind of stamp duty relief in place, with the exception of the 12 months leading up to Liz Truss’s “mini”-Budget.
For almost four years, home-movers, for example, have not had to pay stamp duty on the first £250,000 of the property’s price.
But on April 1, stamp duty rates returned to what they were before the early stages of the coronavirus pandemic; interest rates, however, have not.
So in an era of higher interest rates, and now higher stamp duty rates, what does the new normal for the housing market look like?
Data shows the deadline and end of the stamp duty cut, as expected, had its effects.
The latest Land Registry figures show average house price annual inflation was 3.5 per cent in April, down from 7 per cent the previous month.
Activity in the housing market also slowed in April, which saw 65,110 residential transactions, according to seasonally adjusted data from HMRC. The figure is 27 per cent lower year-on-year and 63 per cent lower month-on-month.
More recent data, however, shows residential transactions reached a seasonally adjusted estimate of 81,470 in May. While 12 per cent lower year-on-year, the figure is 25 per cent higher than April.
A late May report by the consultancy Capital Economics also says leading indicators suggest that most of the recent weakness in housing demand and prices was due to the temporary influence of the stamp duty change, rather than any “longer lasting influence of the softer outlook for the UK economy”.
One of the reasons the consultancy cites is data from surveyor body RICS, which shows the balance of new buyer enquiries in Scotland had not fallen in recent months and instead remained relatively flat, unlike for the UK overall.
Rates of the equivalent to stamp duty in Scotland — the land and buildings transaction tax — have remained the same since April 2021.
As changes to stamp duty do not apply in Scotland, Capital Economics says this suggests much of the recent weakness in demand in the rest of the UK was due to these changes.
Besides stamp duty reliefs, low mortgage rates fuelled demand in the housing market. Some rates fell below 1 per cent in 2021.
“The availability, or unavailability, of cheap finance does have an impact on the housing market,” says Mark Harris, chief executive of SPF Private Clients, a mortgage broker.
“During the financial crisis, there were few transactions. However, even a lockdown didn’t hold the market back, as rates were slashed and people took advantage in the race for space.
“Stamp duty incentives also encourage buyers to transact, so since the stamp duty concession ended at the start of April, interest rate reductions will be even more important than before in stimulating the market.”
The benchmark for reduced mortgage rates is currently 4 per cent. Nationwide, for example, cut some of its rates at the start of July, with reduced rates starting at 3.81 per cent.
“I think it’s a positive sign that we’re seeing more five-year fixed rate mortgages fall below 4 per cent,” says Tom Bill, head of UK residential research at Knight Frank. “Mortgage rates starting with a ‘three’ is always a good psychological boost for the housing market.”
But Bill says the market is not necessarily relying on rate cuts. “The expectation of rate cuts is priced into the mortgage market; the swap market is based on interest rate expectations. So you don’t need the rate cut to happen, for it to support the market.”
‘The number of housing transactions can recover’
Lower stress rates enabling larger loans could also support demand, after the Financial Conduct Authority reminded lenders in March that “flexibility” was available in its stress test rule.
The six biggest mortgage lenders, which account for about three-quarters of the market, have reduced their stress rates, says Capital Economics.
Borrowers are also taking longer mortgage terms. The average first-time buyer’s mortgage term, for example, was 31 years as of March, compared with 28 years in March 2015, according to UK Finance.
Capital Economics says many borrowers extended their terms to offset the rise in monthly payments caused by higher rates, supporting demand and prices.
“The increase in mortgage terms and looser lending standards has led to a shift in the relationship between housing transactions/prices and mortgage rates that probably has a bit further to run,” the consultancy adds.
“That’s why we think the number of housing transactions can recover to their pre-pandemic monthly average of around 100,000, and house prices can rise by about 4 per cent a year on average over 2025-27, even though mortgage rates won’t fall back to the pre-pandemic lows of below 2 per cent.”
Have we seen the last of stamp duty holidays?
Stamp duty rates are back to pre-pandemic levels, after a period of nearly five years in which cuts were introduced, extended, and then reintroduced.
“The market has moved past temporary boosts like stamp duty relief,” says Kevin Roberts, director of Legal & General Mortgage Services. “Now we’re seeing market activity that is self-sustaining, with property listings, completions and lending volumes all pointing to solid demand.
“Gross lending forecasts from UK Finance and other big lenders indicate strong levels of purchases and remortgages this year, with potential for even higher figures in 2026 and 2027 as more five-year fixed-rate mortgages mature.”
Stamp duty holidays are not necessarily ruled out in the future though.
“I think it’s a tool that politicians and policymakers use, especially when there are shocks to the economy and the financial system, or other things that suggest support is needed,” says Nationwide chief economist Robert Gardner.
“So I think if those circumstances arrive again, then it’s perfectly possible we’ll see similar responses in future. But a preferable approach would be to reform property taxation more generally in the UK.”
Chloe Cheung is a senior features writer at FT Adviser