What will happen to house prices after the stamp duty holiday ends?

Since the Chancellor, Rishi Sunak, introduced a temporary reduction to stamp duty land tax rates in July 2020 to revive a housing market stricken by the Covid-19 pandemic, there has been a dramatic increase inproperty purchases and, as a result, in house prices.

With the property threshold for stamp duty raised to a generous £500,000 for main residence properties bought from 8 July 2020 to 31 March 2021, buyers have been incentivised by savings of up to £15,000, with many properties becoming exempt from the stamp duty tax altogether and buyers purchasing properties which have been sold for over £500,000 only taxed on any amount above £500,000.

Whilst a backlog of properties and buyers unable to progress during the first lockdown of March – May 2020 may have accounted for the initial property boom and quickest rise in house prices seen since 2016 in the second quarter of 2020, we continued to see a rise in property transactions and house prices throughout the rest of 2020.    

So, what will happen when the stamp duty holiday ends?

Well, as currently planned, stamp duty rates will return to pre-relief rates (shown below) from 1 April 2021, with first time buyers still eligible for a discounted rate on properties with a purchase price of £500,000 or less.

Pre-relief stamp duty rates

But what will this mean for the property industry and what will the impact be on house prices?

Many industry insiders are looking towards international housing markets as a way to predict what may come next. In Paris for instance, where they also experienced a similar property boom post-lockdown in 2020, with no financial relief like the UK’s stamp duty holiday on offer, both numbers of sales and house prices quickly fell again by September 2020.

Indeed, the Nationwide House Price Index has shown that annual house price growth in the UK has slowed down for the first time in six months as we approach the deadline for the end of the stamp duty holiday, with growth down to 6.4% after a high of 7.3% in December2020, the highest rate since January 2015. House prices have also decreased by 0.3% month on month (0.9% in January 2021) and given that we are already seeing a contraction in the UK economy, with suggestions of a recession looming, the impact on buyer and lender confidence is likely to see house prices fall further.

And whilst our first lockdown period in 2020 saw the housing market effectively shut down, this time around, viewings and house moves have still been taking place during the second and third UK lockdown periods. However, there is a significant delay in the completion of transactions with sales taking significantly longer than the usually anticipated 12 weeks as estate agents, conveyancers, surveyors and removals companies work through huge backlogs. As such, there is a real danger that high numbers of buyers will miss the stamp duty holiday deadline of 31 March 2021 and suddenly be liable for a pricey stamp duty bill. 

So, with the potential of an industry slump and buyers hit by mounting costs which may see them pulling out of sales or falling into financial difficulty, what are the odds on an extension to the stamp duty holiday deadline? 

Up until very recently, the Government has remainedfirm on the deadline of 31 March 2021, with Housing Minister Chris Pincher stating at the end of the October that “The government does not plan to extend this relief and will continue to monitor the property market.”

However, with calls from property industry insiders for an extension to the stamp duty holiday over concern that anywhere between 100,000 – 325,000 buyers may be unable to complete their transactions before the deadline, and a petition to extend the stamp duty holiday for a further 6 months signed by over 140,000 people, it seemed as though the tide was beginning to turn when MPs debated the idea of an extension to the stamp duty holiday on 1 February 2021. The idea of an extension orallowing buyers already part way through a sale to still benefit from the stamp duty break even if they complete after 31 March 2021 has received support from both Conservative and Labour MPs.

Jesse Norman, Financial Secretary to the Treasury, also noted during the debate that the government would note views from the public and MPs carefully, considering“substantial performance as well as completion” when deciding on the arrangements for the end of the stamp duty holiday. So not the outright “no” to an extension that we have heard from the government previously, with many anticipating a softer deadline which would allow those completing an on-going sale after the deadline to still receive stamp duty relief.    

Unfortunately, we will need to wait until 3 March when the Chancellor releases the next Budget to know what the result will be for a stamp duty extension and the impact this will have on on-going transactions and UK house prices.