"While a rebound will inevitably follow this year, and borrowing costs are on a broad downward trajectory, the housing market faces a different set of obstacles, which are more economic than political in nature"
- Tom Bill - Knight Frank
A spike in housing transactions in March was followed by an April slump thanks to higher rates of stamp duty (SDLT).
That is a simple overview of the UK housing market in early 2025, as new SDLT rules reduced the nil rate band and raised the surcharge for additional properties.
It is also an exact description of what took place nine years ago, when a 3% additional rate for landlords and second-home owners was introduced in April 2016.
The more comprehensive nature of the changes this time, which included a maximum saving of £11,250 for first-time buyers, meant the rollercoaster ride was a little more intense.
The number of transactions in March was 104% higher than last year, while there was a 28% fall in April, HMRC data showed last week. That compares to an equivalent jump of 80% in March 2016 and a decline of 18% in April.
Frustratingly, the distortive effect of the SDLT changes makes it difficult to assess the underlying health of the market, which would normally feel more active at this time of year.
Lessons from nine years ago
Looking to 2016 for clues about what happens next is helpful, but only up to a point.
The number of transactions in May 2016 was 11% higher than in April, which was an encouraging if predictable rebound. Perhaps more surprisingly, the figure also increased 8% between May and June, the month of the Brexit vote.
Activity during the rest of 2016 was relatively muted, with year-on-year declines between -5% and -10% as confidence dipped in the aftermath of the EU vote and investor landlords were put off by the 3% surcharge, as the chart shows.
Transaction volumes then held steady between 2017 and the pandemic. Buyers began to tune out the political background noise but there were occasional dips due to concerns around the stability of the government after the June 2017 general election and the spectre of a no-deal Brexit.
However, the uncertainty meant annual price growth fell from 5.6% in August 2016 to 0.5% three years later, according to Nationwide.
While a rebound will inevitably follow this year, and borrowing costs are on a broad downward trajectory, the housing market faces a different set of obstacles, which are more economic than political in nature.
The current Labour government has a majority of 165, and while there is speculation over how long several members of the cabinet will remain in their job, Westminster is a more stable place than it was between 2017 and 2019.
However, a bank rate of 4.25% today compares to 0.25% eight years ago, which means the lending landscape is tougher. Rate cuts have also become a more remote possibility in recent weeks, which could sap the momentum of any rebound.
Inflationary Pressures
Indeed, the dip in transactions in 2023 and 2024 (see chart) was caused by 13 consecutive Bank of England rate rises and the inflation scare that followed the mini-budget in September 2022.
Stubborn inflationary pressures and the government’s fast-shrinking financial headroom are largely to blame for the deteriorating rate outlook in 2025. Bank of England policymakers also seem split on the eventual impact of Donald Trump’s tariffs on the UK economy.
Despite the risks, we revised our UK house price forecasts marginally higher last month to reflect the expectation that more sub-4% mortgages should become available over the next six months as inflation is ultimately tamed.
However, the imbalance between supply and demand could also have a short-term impact on any recovery. Transaction numbers this spring will only be supported if asking prices reflect the wider choice on offer for buyers.
Average UK prices rose 3.5% in the year to May, Nationwide said on Monday, which was only marginally higher than a reading of 3.4% during the April slump.
The other consideration is that the 3% surcharge for second homes became 5% in April. It takes buyers further up the Laffer Curve – the theory that suggests higher taxes can lead to lower overall revenue due to falling activity.
For a government with virtually zero financial headroom, the concept is something it may want to examine more closely.
Overall, while a rebound in transactions in the UK housing market is a certainty, the same cannot be said for prices.
