House price growth slows in August

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.

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.

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.