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Should home buyers rush to beat the stamp duty deadline?

04 June 2021

Jonathan Marriott, Chief Investment Officer

This week, the Nationwide House Price Index showed a 10.9%[1] increase from last year. The Deputy Governor of the Bank of England, Jon Cunliffe, commented that they were watching house prices but thought they were being driven higher by tax changes. At the end of this month the stamp duty holiday introduced during the pandemic comes to an end.  It has been widely reported that solicitors have been run off their feet in an attempt to get transactions completed before the end of the month. Whilst the UK went through a deep recession last year, there was no down move in the house price index. During the financial crisis in 2008/9 house prices dropped nearly 20%. Last year there was hardly any dip but this may be because the pandemic meant that there were far fewer transactions. The Government and the Bank of England have provided enormous stimulus and some of this appears to have found its way into the property market. So how much impact has the stamp duty holiday had and will house prices decline when the support is no longer there? The last time an expected tax rise apparently boosted house prices was in 1988 when changes to mortgage interest relief were introduced. 

Mortgage Interest Relief At Source (MIRAS) allowed tax relief for interest on a mortgage of up to £30,000.  An unmarried couple buying a property together could both get relief giving a total of £60,000. This may seem a small thing today, but the average house price at the start of 1988 was about £41,000 versus over £256,000 today (UK land registry). The Bank of England Base rate was 8.5% at the start of that year but had risen to 13% by the end of the year. So tax relief on interest was significant. In August 1988, the relief was restricted to one amount of £30,000 per property on new mortgages.  People sharing property rushed to buy before the deadline. Between March and September 1988 the Nationwide House Price Index rose 20%[2]. This steep rise was attributed to the tax change.

In October 1987, the FTSE 100 Index had fallen over 30% and a friend of mine promptly sold his house on the expectation of a subsequent property market collapse. The stock market collapse sent shocks through the system and the Bank of England cut its base rate from 10% to 8.5% to stimulate the economy. As noted above, property held up despite the stock market shock. In fact, the property market had a degree of momentum and prices continued to rise after the August deadline for tax relief. Prices had been rising without a significant correction for over 30 years and having survived the 1974 and 1987 stock market collapses, many people thought that prices could not go down. However, the base rate hit 15% in 1989 and over the next three years the house price index fell 19%[3].

Those were very different times, but what lessons can we learn from this? Firstly, residential property prices may be supported by people buying ahead of a tax rise to a greater degree than the price rise.  A stock market fall does not necessarily lead to a fall in house prices. House prices are not invincible and do go up and down like any other investment.  

The stamp duty saving is a maximum of £15,000 on a £500,000 property and is being phased out but in the overall scheme of things this is a small saving and rushing to buy now may be unnecessary. The Nationwide Survey this month showed other interesting trends with the stamp duty holiday less important than moving to another area and access to outdoor space/gardens being important to about a third of people looking to move. The property market is likely to be more nuanced as life style changes and the move to work from home removes the need to live in city centres.  It will be interesting to see how long these trends last.

One final thought; my friend who sold his house in October 1987 was sucked back into the market before the end of 1988 only to find the value of his house was less than his mortgage within two years.  Of course, property picked up again and prices now are much higher. The lesson is to buy property for the long term not for quick profit. Stamp duty and the cost of moving can cost a lot so take time to buy rather than rushing to beat a tax deadline.

[1] Bloomberg

[2] Bloomberg

[3] Bloomberg

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