Annual house price growth dropped from the 13.4% reported in June, with prices dropping by 0.5% month-on-month.

July’s drop in prices offers some early evidence that the tapering of the stamp duty holiday in June has already had an effect on the market. But the tax concession was not the only factor driving strong growth in property prices and valuations are likely to stay elevated for the time being.

The evidence is growing that the economic consequences of the pandemic have prompted an upward shift in house prices. Some of those consequences, such as government support to households and ultra-low interest rates, will eventually fade. But others, such as increased demand for larger properties in a world of more home working, could prove long-lasting.

Robert Gardner, Nationwide’s chief economist, said: “The modest fallback in July was unsurprising given the significant gains recorded in recent months. Indeed, house prices increased by an average of 1.6% a month over the April to June period – more than six times the average monthly gain recorded in the five years before the pandemic.

“The tapering of stamp duty relief in England is also likely to have taken some of the heat out of the market. The nil rate band threshold decreased from £500,000 to £250,000 at the end of June (it will revert to £125,000 at the end of September). This provided a strong incentive to complete house purchases before the end of June, especially for higher-priced properties. For those purchasing a property above £250,000, the maximum stamp duty saving reduced from £15,000 to £2,500 after the end of June.”

Mr Gardner added that the stamp duty changes drove the number of housing market transactions to a record high of almost 200,000 in June as home buyers rushed to beat the deadline. This was around twice the number of transactions recorded in a typical month before the pandemic and 8% above the previous peak seen in March.

Land Registry data indicate that higher-priced properties have been driving the increase in housing market activity since the pandemic struck.

Mr Gardner said: “For example, the number of transactions involving properties bought for £500,000 or higher increased by 37% over the 12 months to March 2021, compared to a rise of 2% for all properties. As a result, between Q1 2020 and Q1 2021 the share of transactions involving a property valued at £500,000 or above has increased from 12% to 18%.

“There has also been a shift in the composition of property types that have been transacting. Over the past six months the proportion of sales involving detached and semi-detached properties has increased, while the proportion involving flats has declined significantly.

“While tax changes have been important in determining the timing of transactions and the trends noted above, they have not been the main factor prompting people to move in the first place. Amongst homeowners surveyed at the end of April that were either moving home or considering a move, three quarters said this would have been the case even if the stamp duty holiday had not been extended beyond the original March 2021 deadline.”

Mr Gardner also revealed that shifting housing preferences appear to have been the more important factor in driving the increase in housing market activity, with people reassessing their housing needs in the wake of the pandemic.

At the end of April, 25% of homeowners surveyed said they were either in the process of moving or considering a move as a result of the pandemic.

Given that only c.5% of the housing stock typically changes hands in a given year, it only requires a relatively small proportion of people to follow through on this to have a material impact.

Commenting on the outlook, Mr Gardner added: “Underlying demand is likely to remain solid in the near term. Consumer confidence has rebounded in recent months while borrowing costs remain low. This, combined with a lack of supply on the market, suggests continued support for house prices. But, as we look toward the end of the year, the outlook is harder to foresee.

“Activity will almost inevitably soften for a period after the stamp duty holiday expires at the end of September, given the incentive for people to bring forward their purchases to avoid the additional tax.

“Nevertheless, underlying demand is likely to soften around the turn of the year if unemployment rises, as most analysts expect, as government support schemes wind down. But even this is far from assured. Even if the labour market does weaken, there is also scope for shifts in housing preferences as a result of the pandemic to continue to support activity for some time yet.”