Rising house prices are the new normal – the Government is making sure of it
First-time buyers desperate to escape the private rent trap are paying increased deposits and entering into bidding wars
By Vicky Spratt
What happens when the abnormal becomes normal? We’re finding out when it comes to Britain’s housing market. Over the last two decades there has been talk of “booms” and “bubbles” during periods of house price inflation. The last time there was a “crash” was 10 years ago, during the global financial crisis when house prices fell by 16 per cent. Since then, they have broadly remained stable and on an upward trajectory.
If they were ever going to fall, you might have thought that it would be amid the economic uncertainty of the coronavirus pandemic. Yet, house prices have continued to climb. According to the Nationwide Building Society, UK house prices were 6.5 per cent higher at the end of 2020 than they were in 2019 – the sharpest rise for nearly six years.
This, in no small part, is because the Government has deliberately introduced policies which will inflate the housing market and prop up the mortgage lending industry. First, there was a stamp duty holiday and, then, last month, the Chancellor announced the return of government-backed 95 per cent mortgages in his economic recovery budget. As of this week, banks such as Lloyds, Santander, Barclays, HSBC and NatWest are offering these.
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A housing bubble would be caused in a market where rising prices were not underwritten by the money available to pay them. However, since the global financial crisis and the house price crash it caused, credit has remained cheap. This has remained the case since and continued during the pandemic. This is what keeps the market afloat despite the bloat – but it doesn’t come without consequences.
The housing market is running incredibly hot right now. According to RightMove, spring home buyers are facing the highest ever prices demanded by sellers. Across Britain, the property website said that the average increase in asking price was £6,733 in April, or 2.1 per cent month-on-month.
Of course, asking prices and sale prices are not the same thing. But, it seems that this is impacting the latter too.
Andrew Asaam, mortgages director, Halifax, recently said that the average first home deposit has gone up by £11,000 since the start of the coronavirus pandemic. There are also reports of bidding wars breaking out across the country. In the first part of this year, 36 per cent of sales made by Countrywide, which has more than 600 branches, have received bids from three or more people. Almost a fifth (18 per cent) got offers from five or more. Media reports describe a buying and bidding “frenzy”. Analysis by the estate agent Hamptons shows that 28 per cent of homes in England and Wales sold in the first part of this year, went for more than their initial asking price. That’s the highest proportion since its records began and up from 19 per cent from 2020.
On the face of it, these reports have all the hallmarks of a “housing bubble”. However, the bidding wars and price inflation we are seeing is “exactly what you would expect in a financialised housing market where mortgage rates are very low,” according to housing market analyst Neal Hudson. The status quo is now high house prices. It is being deliberately and artificially maintained by measures to stimulate borrowing but it is, nonetheless, the status quo. House price inflation is the new normal.
What if house price inflation is here to stay, enabled by public policy which finds creative ways to get buyers into more debt to keep the market moving? What if the “bubble” never bursts?
In the 1990s Japan’s housing market was stagnating because of wage deflation which meant that people couldn’t afford standard mortgage terms. To keep it going, 100-year mortgages were introduced. These could be passed down through families and enabled people to buy homes they otherwise could not afford, but housing remains seriously unaffordable in Japan for the average worker.
Could we one day see such measures introduced in the UK?
“We have already seen a shift over the last decade or so,” Hudson says. “The average mortgage term of a first-time buyer used to be 25 years but, now, increasingly 30 or 35-year mortgages are normal. This is because mortgage terms are the bit of lending which is easier to stretch to make housing ‘affordable’.”
The Government won’t allow a house price crash because the knock-on effect on our economy would be too severe, he adds. “We are stuck where we are – with house price inflation. The clear message that I took away from the Budget last month was that this is a government which recognises that maintaining house prices where they are or higher is important to them politically and economically because so much of our economy is now based around the lending which is secured against house prices.”
Rising house prices might mean that some people can never get on the housing ladder. This might cause the continued expansion of the private rented sector. But, regardless, our government and banks are now so reliant on housing that they need people to keep moving house and taking out mortgages to keep our economy turning. And the housing market relies on the compliance of consumers – particularly eager first-time buyers desperate to escape the private rent trap.
It requires their desire to get on the property ladder to be greater than their concerns about the affordability of inflated prices. They certainly do put those concerns to one side when they pay increased deposits and enter into bidding wars.