Property Transaction Taxes and the Housing Market: Evidence from Notches and Housing Stimulus in the UK

We provide evidence on the eect of property transaction taxes (stamp duty) on house prices, the timing of house transactions, and the volume of house transactions. To address these questions, we exploit administrative data covering the universe of stamp duty tax returns in the United Kingdom from 2005-2011 along with compelling sources of identifying variation. First, discontinuous jumps in the stamp duty at threshold property prices|notches|allow us to estimate the eect of the tax on house prices. Second, anticipated and unanticipated changes in the tax schedule allow us to estimate the dynamics of price responses and timing eects on house transactions. Third, a temporary exemption of some properties from the tax|a stamp duty holiday|aimed at stimulating the housing market during recession allows us to provide micro evidence on macro stimulus policy. We nd that the eect of transaction taxes on house prices is large (often larger than the tax itself) and that dynamic adjustment to changes in transaction taxes is very fast. We also nd that the timing of house transactions responds sharply to anticipated tax increases. Finally, temporary cuts in transaction taxes successfully stimulate housing market activity in the short run|a 1% cut in the tax achieves a stimulus eect of 10% additional transactions at its peak|but the temporary boost in activity is followed by a slump in activity after the policy is withdrawn. The cumulative eect