Transactions tax change during the pandemic: A study of the UK housing market

Abstract

During the Covid-19 pandemic, the UK government reduced the transaction tax on house sales, i.e., the Stamp Duty Land Tax (SDLT) rate, to stimulate the housing market. Based on a difference-in-difference framework and over 400,000 repeat sale transactions, we find a significantly positive impact of the tax holiday on both home prices and trading volumes. On a national scale, on average, 79.92 % of the surplus generated by the holiday accrued to buyers, accompanied by a noticeable level (10.27 %) of welfare loss. Regional analysis validates the leverage channel, revealing that transaction prices and volumes respond significantly more in areas with severe liquidity constraints. This finding underscores the effectiveness of tax reductions in easing down-payment constraints, thereby enabling more households to become homeowners. However, the resulting upward pressure on prices reduces the net benefit for buyers and exacerbates market inefficiencies. The potential downsides should not be overlooked, particularly in areas with tighter liquidity constraints and lower housing affordability.