Following the initial seven weeks of lockdown last year, the housing market was permitted to fully re-open and operate as normal from 13 May. Less than two months later the Chancellor announced a stamp duty holiday which then came into force on 8 July 2020. Since then, transaction volumes and mortgage approvals across England and the UK have jumped dramatically. Latest data from the Bank of England shows nearly 100,000 mortgages were approved in October, up nearly 7% over September’s figure of 92,000, the highest mortgage approval rates since before the financial crisis in 2007.
The stamp duty land tax ‘holiday’, that the Chancellor began in July 2020 has been heralded as widely successful at helping to buoy the housing market. The tax break has acted as a catalyst for confidence in the market which saw sales decline dramatically during the first lockdown restrictions in April and May last year.
Monthly sales volumes and house price growth
120,000
100,000
60,000
40,000
20,000
0
2017
2018
2019
2020
Source: ONS, Bank of England
Bank of England mortgage approvals (England)
ONS (RHS)
Monthly mortgage approvals
Annual house price growth %
4.0
3.0
2.0
1.0
0
A Case fOr Extending THE
holiday
Ending or extending:
How does a strong housing market support the economy?
In this article, we look at how the housing market responded following the lockdown and the subsequent stamp duty holiday, how far and wide the housing market impacts other areas of the economy, and finally we make a case for why we believe the current tax break should be extended for first-time buyers, beyond the 31st March 2021 deadline.
At the same time, house prices have grown by between 5% and 7.5% according to the latest house price indices (Halifax and Nationwide), the highest pace of growth that both banks have recorded in nearly five years while the ONS data shows the highest house price growth since 2017.
100,000
31st March
2021
the SDLT holiday ends
the SDLT holiday begins
8th July 2020
mortgages approved in October
growth in
house prices
5-7%
80,000
5.0
9.0
8.0
7.0
6.0
2015
2016
Clearly the housing market has been a very strong, robust and active sector for the last few months but what makes this all the more interesting is that this is all happening at a time when much of the rest of the economy is still in the doldrums or growing at a much slower speed. Following months of the global COVID-19 pandemic and its associated restrictions and lockdown measures, the UK economy has yet to return to pre-pandemic output levels while the housing market has not only hurtled right past pre-pandemic figures, but in many cases is reaching 5-10-year record rates.
What has caused the swell in demand?
In our Winter 2020 Housing Market Outlook we discussed the impact of the stamp duty tax break holiday on transaction levels and house price inflation. In it we pointed out that during the 2008 / 2009 stamp duty tax break residential property sales increased rapidly in the months during which the holiday was in place. We also noted that although house sales dropped off again after the tax break came to an end, the decline was neither stark nor dramatic.
Pent-up demand
Changing priorities
SDLT holiday savings
On average, monthly transactions in the eight months after the stamp duty holiday ended fell by around 10% compared with the previous eight months. This was also the case for house prices – the pace of house price growth slowed but it did not stop altogether as demand remained resilient. This last stamp duty holiday lasted 16 months but that was a much longer downturn and its cause (global credit crunch and credit risk) made it difficult for the housing market to function normally. The current stamp duty holiday is due to expire on 31 March 2021, meaning it will be in effect for a little less than nine months.
The Stamp Duty Land Tax (SDLT) ‘holiday’
120,000
-5.0
Monthly transactions
Annual % change
100,000
80,000
-10.0
60,000
-15.0
40,000
-20.0
15.0
10.0
5.0
0.0
20,000
2009
2008
2010
0
Transactions (LHS)
House price growth (RHS)
Source: HMRC, HM Land Registry
UK Transactions and house price growth before, during and after the Stamp Duty holiday, 2008/2009
Stamp duty holiday period:
Sept 2008 - Dec 2009
The multiplier effect
The input and output multipliers within and surrounding the housing market can be described as falling into three types: 1: Direct, 2. Indirect, and 3. Induced. Examples of industries in each of these three areas which benefit from a strong and active housing industry are listed below. These businesses and industries will see a consequential impact on their income and revenue as activity in the housing market rises.
A strong and growing housing market contributes to the wider economy, it reflects consumer confidence, and this then leads to greater spending patterns, stronger output and growth, and job creation. On the microeconomic level buying and selling homes contributes to growth as it stimulates additional expenditure in the local economy. This is what can be described as the multiplier effect – the accompanying spending associated with a house transaction in both newly built homes and second-hand homes benefits economic output as it requires materials, professionals, retail services, and creates jobs.
The rise in residential transaction levels will clearly have a direct positive impact on the real estate sector. However, there are a multitude of other industries, businesses and services which benefit from a strong and active housing market, and we have described this as the housing market multiplier effect: there is an increase or decrease in income from other industries as a result of the spending (or lack of) in the housing market sector.
DIRECT
INDIRECT
INDUCED
Direct multipliers are areas within the economy that occur in ‘front-end’ businesses dealing with the buying and selling of homes and receiving a benefit (revenue) as a direct consequence of that.
Indirect multipliers meanwhile might measure the change in activity for suppliers of the direct businesses or from the consequence of a move, for example. This could be described as a ‘ripple effect’.
Finally, induced multipliers measure impacts arising from the shifts in spending on goods and services as a consequence of the action or change so for example, once a move has occurred.
Builders
Architects
Painters and decorators
Gardeners and landscape gardeners
Interior designers
Labourers
Plumbers
Electricians
Cleaners
Carpenters & cabinet makers
Engineers
Estate agents
Conveyancers
Surveyors
Mortgage brokers
Banks/lenders
Removal firms
DIY & building suppliers
Home furnishing retailers
Paint supply retailers
Carpet supply retailers
Home or wellness brands
Extending or ending the current tax break
The current stamp duty holiday is due to expire on 31 March 2021. Many will argue that it should be extended, and the government may well want to do so. Conveyancers across the country have said that the current workload is so high that they are struggling to deal with the volume of work that needs to be processed, and sales are taking longer to exchange contracts, as a result. If there is a large pipeline of agreed sales still ‘on the books’ come mid-January than the government may agree that an extension is necessary to get those over the line.
The multiplier effect
On the other hand, the end of the tax break has to happen at some point. With vaccines now being rolled out there is optimism that the economy should be in a good recovery phase by the end of March. Nevertheless, when it comes to an end this will inevitably slow the upward pressure on prices, as activity and some sources of demand will decline. Our proposal to keep it open for up to six more months for first-time buyers (a group that account for around 35% of all purchases every year), means there will be one source of demand that remains robust and growing, and it is the cohort of buyers who would benefit most from the tax break. This group have been disproportionately disadvantaged by the current strength in the housing market: rising house prices push a purchase yet further out of reach for FTB’s. This group have also been disadvantaged by the large-scale removal of higher LTV mortgages that we have seen throughout 2020. Last year 90% + LTV mortgages accounted for around 20% of all mortgage products, this has decreased to around 5% now, and these are the products that many FTB’s would normally need.
In conclusion
Housing investment may be a small part of how total output is measured, and in many ways, it is quite unpredictable (nobody knows just how much investment a household will make on their new home). But it certainly benefits the economy both at a local level and a national level and we can see this through the examples across the various multiplier types. Not only are there multiplier benefits on a house transaction but a strong housing market instils confidence in consumers more widely.
The current rates of house sales, mortgage approvals and transaction levels are running at a 10-year high. While this level is not necessarily expected to continue even if the stamp duty holiday runs for another six months, what we can guarantee is that the end of the stamp duty holiday will eliminate one area of demand which is helping to boost current levels.
drop in monthly transactions after 2008/09 SDLT break
10%
MARKET OUTLOOK
Given the benefit that a strong housing market has on the many other parts of the economy that we have discussed, and at a time when economic growth and output is expected to stay subdued, it makes sense that the one area of the economy (the housing market) that is doing so well is incentivised and encouraged to continue. By extending the SDLT tax break for first-time buyers this would be one important way of assisting not just economic growth but consumer confidence too.
If you want to take advantage of the stamp duty holiday and move before the 31st March, get in touch to book a complimentary market appraisal or view our available properties.
© Carter Jonas 2020.
The information given in this publication is believed to be correct at the time of going to press. We do not however accept any liability for any decisions taken following this report.
We always recommend that professional advice is taken.
Carter Jonas Residential Research | December 2020
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