05 September 2017

House price growth slows in August

  • Annual house price growth slows to 2.1%, from 2.9% in July
  • Modest 0.1% fall month-on-month
  • Stamp duty revenues rise to new highs

Nationwide’s Chief Economist analyses the Society’s latest house price data, looks at the stamp duty changes and the income that stamp duty is generating.

The annual pace of house price growth moderated to 2.1% in August, from 2.9% in July. The slowdown in house price growth to the 2-3% range in recent months from the 4-5% prevailing in 2016 is consistent with signs of cooling in the housing market and the wider economy.

The economy grew by c.0.3% per quarter in the first half of 2017, around half the pace recorded in 2016. The number of mortgages approved for house purchase moderated to a nine-month low of c.65,000 in June and surveyors have reported softening in the number of new buyer enquiries.

Nevertheless, in some respects the slowdown in the housing market is surprising, given the ongoing strength of the labour market. The economy created a healthy 125,000 jobs in the three months to June and the unemployment rate fell to 4.4% – the lowest rate for over forty years. In addition, mortgage rates have remained close to all-time lows.

It may be that mounting pressure on household finances is exerting a drag. Wages have been failing to keep up with the cost of living in recent months and consumer sentiment has weakened. While measures of housing affordability are not particularly stretched at a UK level, pressures are evident in some regions – especially London and the South of England.

Regional affordability chart

Ultimately, housing market developments will depend on wider economic performance. The UK economy slowed noticeably in the first half of the year, and there has been little to suggest a significant rebound in the months ahead. While employment growth has remained robust, household budgets are under pressure. This suggests that housing market activity will remain subdued.

Nevertheless, constrained supply is likely to continue to provide support for house prices. The stock of homes on estate agents’ books remains close to 30-year lows and the number of new homes coming onto the market remains subdued. As a result, we continue to expect prices to rise by around 2% over 2017 as a whole.

Stamp duty revenues rise to new highs

Stamp duty land tax (SDLT) revenues have reached all-time highs in cash terms in recent quarters, reaching £12.8 billion in the twelve months to Q2 2017, well above the £10.6 billion peak recorded in late 2007.

Total SDLT

This may appear surprising, given that the number of residential property transactions in the year to June 2017 was 30% below that recorded in the same period of 2007.

Higher house prices are part of the explanation. UK prices are 12% above their 2007 peak. More importantly, house prices in London, the Outer Metropolitan and the Outer South East regions are significantly higher (56%, 38% and 26% higher than the 2007 peak respectively). This is important because these regions contribute significantly more than their par share of stamp duty revenues as house prices are well above the UK average. For example, in 2007, London and the Outer Metropolitan regions accounted for 25% of housing transactions, but an estimated 50% of total stamp duty revenues (in England & Wales).

The imposition of a 3% levy on the purchase of second homes in April 2016 is the other major factor – the levy accounted for 22% of total residential SDLT revenues in the last 12 months.

Residential SDLT

Stamp duty revenues likely to have risen further

The abolition of the “slab” structure of SDLT tax rates is unlikely, by itself, to have increased the total amount of SDLT raised (indeed, we estimate the new system raises slightly less revenue). But, by making the system more progressive, with higher valued properties paying an even greater share of total tax than before, London and the South East are likely to be paying an even greater proportion of SDLT than under the old “slab” system, compounding the impact of stronger house price growth in these regions in recent years.

This trend is likely to be further exacerbated by the introduction of the 3% levy on second homes in 2016, given the greater role of the private rental sector and investment properties in London and the South of England. While the data is not yet available from HMRC, it is likely to show that London and the South of England also recorded a higher concentration of transactions, attracting the additional 3% stamp duty levy on second homes.

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About the author

Robert Gardner

Robert Gardner is Nationwide’s Chief Economist, leading a team which provides economic analysis and advice, focused on developments in the UK economy, with particular emphasis on the housing market and house prices.

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