Effects of Increasing the Stamp Duty for Second Homes

Stamp Duty increases for second homes

The Autumn budget on 30th October 2024 announced an increase in the Higher Rate of Additional Dwellings in Stamp Duty Land Tax on the purchases of second homes, buy-to-let residential properties, and companies purchasing residential properties, from 3% to 5% from 31 October 2024. The aim is that households purchasing their first property or looking to move home have a competitive advantage over those purchasing additional property. The government expects that this results in 130,000 additional transactions over the next five years by first-time buyers or home movers.

Would that be the case and would first-time buyers have a competitive advantage?

We have looked at a similar policy dating back to 2016 and analysed its effects on house prices, rents and housing supply in our paper To Rent or To Own.

A similar policy of increasing the Stamp Duty Land Tax from 0% to 3% was implemented on 1st April 2016. Unlike the 2024 increase in the stamp duty surcharge for second homes from 3% to 5%, which came completely unexpected, the 2016 increase was debated prior to being implemented. The government ran a consultation on this and announced it at the Spending Review and Autumn Statement in November 2015. This allowed the market to prepare to the increase and speed the transaction process prior to a higher tax rate being implemented.

As argues above in the 2024 Autumn Budget statement, the aim of such policies is to free up existing housing stock for first-time buyers and home movers. However, it is not clear if such policies make housing more affordable or less affordable. Ideally, such polices should be aimed at reducing the price for homes for owner occupation. However, the effects of such policies are never one sided.

We have studied the stamp duty surcharge introduction in 2016 using a difference-in-differences modelling. We are able to identify properties which were sold and subsequently rented between 6 months and 1 year after they have been purchased, which we classify as “buy-to-let” (BTL) properties. We look at the effects on transaction volumes, house prices, rents and time-on-the market.

Here is what we found.

Reduction in BTL transaction volumes and prices

We show that as expected, the 3% tax surcharge on second homes led to an average decline of 15% in transaction volume associated with BTL properties, meaning that investors pulled out of the market and reduced competition for properties which could have been bought for investment purposes. As a result of that, house prices declined on average by 1.4%. This means that 15% of the volume was freed up for other buyers, which are not using the property to rent out. This is an upper boundary, as we do not capture the entire universe of second homes but only those that have been rented shortly after they have been bought. This means that the stock freed up for first-time buyers and home movers will be certainly less than 15%.

The effect varies over time and Figures 1 and 2 show the changes in each quarter. We see that BTL transaction volume and price increase rapidly around 20% and 2% after the announcement but before the implementation. This means that speculative BTL investors went to the market in a rush to buy before the increase in the transaction tax. After the introduction of the tax, those investors withdrew from the market leading to a 40% drop in transaction volumes and 5% decrease in house prices one quarter after the implementation. The effect on volumes and prices stabilizes 2-4 quarters following the tax introduction with volumes now consistently lower at 20-40% and 1.4% respectively.

Figure 1: Dynamic treatment effects for BTL properties

(A) BTL transaction volumes                                        

  (B) BTL transaction prices

Notes: The figure shows dynamic treatment effects and 95% confidence intervals on transaction volume and price of BTL properties. Standard errors are clustered at both year-month and district level. Treatment time is defined as the announcement date of the additional 3% Stamp Duty Land Tax on second homes. Treated properties are those we identify as “BTL properties”. Control properties are all other properties. The dotted vertical line represents the time of announcement.

Effect on rents

As a result of the higher tax rate. Rents for BTL properties increase by 6% as compared to rents for properties that have not been sold recently. Figure 2 shows the dynamic effects. It looks like the higher costs of stamp duty get passed on to the tenants of those new properties coming to the market. The effect can be worsened due to the reduction in supply of rental accommodation which as well leads to a higher increase in rents overall but more so for BTL properties. These findings suggest a substantial increase in rental payments for existing tenants which makes saving for a home harder and the prospect of home ownership goes further out of reach.

 Figure 2: Dynamic treatment effects on asking rents for BTL properties

Notes: The figure shows dynamic treatment effects and 95% confidence intervals on listing rent for BTL properties.  Standard errors are clustered at both year-month and district level. Treatment time is defined as the announcement date of the additional 3% transaction tax on BTL housing. Treated properties are defined as the BTL properties. Control properties are non-BTL rental properties, i.e. properties that have not sold in the last 6 months to 1 year. The dotted vertical line represents the time of announcement.

Effects on liquidity of home sales and lettings

Figure 3 shows the dynamic effect on the time it takes to sell or rent a BTL property as a result of the increase in the stamp duty, i.e. the time-on-market (TOM). The TOM for renting out BTL properties has been steadily increasing since the announcement and has continued to increase for 8 quarters. Even two years after the announcement, it had taken 50% longer to rent a BTL property than before the introduction of the higher stamp duty. This can be linked to landlords being more selective as to who they rent to or/and struggling to find tenants that are paying the higher rental price, as we have seen above.

On the time to sell, while BTL transaction volumes dropped, the time required to sell properties, which will later be rented out, was nearly unaffected as the investors with long-term rental income goals continued to invest in the market and the supply of BTL properties available to be transacted in the market is still matching the need of the investors.

Figure 3: Dynamic treatment effects on TOM for BTL sales and lettings

(A) TOM for BTL lettings                                                         

(B) TOM for BTL sales

Notes: The figure shows dynamic treatment effects and 95% confidence intervals on TOM for BTL properties sales and lettings.  Standard errors are clustered at both year-month and district level. Treatment time is defined as the announcement date of the additional 3% transaction tax on BTL housing. Treated properties are defined as the BTL properties. Control properties are non-BTL properties. The dotted vertical line represents the time of announcement.

Conclusion

In conclusion, we see that if the objective is to only free up stock for first-time buyers and home movers, then this can be achieved by increasing the stamp duty land tax for second homes, as evidenced by the 2016 reforms. As we are talking about existing housing stock, if more is available for owner occupiers, less is available for renters. Due to the drop in rental stock of 15% on average, rental prices increase by 6%. This is compared to a drop in sale prices of 1.4% of the freed-up owner occupier stock. In the absence of new supply of rental accommodation this policy means that the rental market has become less flexible and more expensive as a result, leading to renters who are far away from buying their first home (more than 5 years in London) needing to stay even longer on the rental market before they are able to move in their own home. In the absence of any other housing policies, a stamp duty increase for second homes shift the burden to the very young generation of renters who will face higher rental payments but will not benefit from the decline in house prices as much.