Transaction Taxes and Housing Market Dynamics: New Evidence from a Quasi-Natural Experiment

Abstract

We use the introduction of a temporary removal of the transaction tax for the purchase of property or land in England – the Stamp Duty Land Tax holiday (SDH) – between July 2020 and March 2021 as a quasi-natural experimental setting to assess the tax implications on prices, trading patterns and liquidity in housing markets. We construct a rich data set of residential transactions in England between 2018 and 2021 and estimate difference-in-differences regression models. We show that the SDH results in a 21% increase in housing transactions and an average of 2% increase in transaction prices. We show evidence for re-distributional effects entirely benefiting sellers, who also are in the stronger bargaining position; first-time buyers and house buyers in rural areas end up paying more than they would without the SDH. The implications of our findings suggest that while a SDH can boost market activity in an economic downturn and enables the housing market to quickly adjust to changing market conditions (working from home as a result of Covid), it also makes housing less affordable.

Keywords: Property transaction tax, stamp duty land tax, house prices, price spread, redistribution effects, bargaining power, big data.