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

Abstract

We assess the effect of a temporary removal of housing transaction taxes in 2020 in the UK, the Stamp Duty Holiday (SDH), on housing prices, transaction and listing volumes, and liquidity. Using a Nash bargaining model, we show that the SDH would lead to an increase in prices and a greater surplus for sellers. We construct several rich datasets of housing transactions in England and estimate difference-in-differences (DiD) models. We show that the SDH led to a boost in market activity and prices during the Covid pandemic, resulting in a 53% increase in transactions and around 2% increase in prices. We confirm the predictions of the Nash model and show that sellers were in a stronger bargaining position which strengthened as the SDH deadline approached allocating the more surplus towards the sellers. While the SDH achieved its intention to stimulate housing market activity during the early stages of the pandemic and to enable the housing market to adjust to a new way of living and commuting, it inadvertently reduced housing affordability for the people most in need of housing.

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