What will happen to UK house prices? Factors that could affect the market in the next few months
What will happen to UK house prices? Factors that could affect the market in the next few months
iMoney asked property professionals and industry observers for their thoughts on the factors that could affect the housing market in the next few months
A near-deserted Warwick town centre as the UK continues in lockdown to help curb the spread of the coronavirus. PA Photo. Picture date: Sunday May 3, 2020. See PA story HEALTH Coronavirus. Photo credit should read: Jacob King/PA Wire
The most significant driver of house sales over the last few months has been a temporary tax break, which initially began in July, and was extended in March (Photo: PA Wire/Jacob King)
By Alys Key
With UK house prices reaching another record high in April, buyers, sellers, and agents are all quietly pondering the same question: can the numbers keep going up?
The pandemic has created a year of rollercoaster developments for the market, and this month it looks very different than it did in May last year, when just a handful of sales went through. Things have changed a lot since then. In-person viewings are possible, small-deposit mortgages are back on the market, and the reopening of shops and services is shaking the economy back to life.
To try and make sense of it all, iMoney cast the net wide, asking property professionals and industry observers for their thoughts on the factors that could affect the housing market in the next few months.
The most significant driver of house sales over the last few months has been a temporary tax break, which initially began in July, and was extended in March.
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Stamp Duty Holiday winding down
The threshold at which Stamp Duty is paid will therefore remain £500,000 until the end of June. It will then taper off, with a £250,000 limit from July to the end of September, and then a return to the normal £125,000 in October.
The suspension of the levy has been identified as the primary reason behind rapid house price growth. Its gradual wind-down is an attempt to avoid any shocks to the market, but there are still fears that its withdrawal will cause a dip.
“The honeymoon won’t go on forever,” said Guy Harrington, chief executive of residential lender Glenhawk.
“The longer the current unsustainable levels of house price growth continues, the sharper and more painful the eventual correction will be. The stamp duty holiday and higher household savings because of the restrictions might paint a positive picture till Autumn, but we will see reality set in once the support schemes end and the scale of slowdown then might catch many by surprise.”
Mortgage guarantee scheme
Last month saw the reintroduction of mortgages to the market requiring deposits of just 5 per cent. It was the first time many had been available since the coronavirus pandemic struck, and the reason most of them returned to sale was because of a new Government guarantee scheme for the low-deposit mortgages.
Alex Hammond, director of consultancy Unlocking Property, said the timing of the scheme is welcome as it “should go some way to counteract the ending of the stamp duty holiday, which I see as having a larger impact on the market”.
The scheme is open to participating lenders offering new 95 per cent mortgages until 31 December 2022. But the Government is presumably hoping the economy will have sufficiently recovered for banks and building societies to continue offering the products on their own once it closes, helping to support demand for homes.
However Kaan Emin, mortgage and protection adviser and director at Apply Mortgages, said the effect of this low-cost borrowing on house prices will be limited: “It will provide new options for individuals who do not have a large deposit but have strong income. What people need to understand is that a 5 per cent deposit option was always available pre-pandemic all they have done is re-introduced these products back on the market and provided Government support to the banks to enrol these products again.”
Perhaps one of the most lasting effects of the pandemic will be on the shape of the housing market as a whole. With remote working a more feasible option, buyers feel able to stomach longer commute times than they previously would.
Analysis from The Resolution Foundation over the weekend found that this has prompted a ‘race for space’ in some of the UK’s least populated areas. Since February 2020, prices have jumped by more than 10 per cent in the least dense tenth of local authorities in the UK, compared to 6 per cent in populous city areas.
Additionally, there could be more room for growth in many areas. Recent research from Warwick Estates found that, although the market is booming, it has yet to return to pre-financial crisis highs when you take inflation into account.
A few pockets sit above their pre-crash highs: London, East of England and South East. But everywhere else is still below 2007 prices on an inflation-adjusted basis, with the biggest gap seen in the North East were prices are down 29 per cent with the inflationary effect accounted for.
Meanwhile, the ‘race for space’ is also prompting more buyers to turn their aspirations towards what might normally be thought of as second-stepper homes.
“Many potential buyers no longer aim to buy small and work their way up the ladder, instead opting to rent long-term and build a substantial deposit rather than taking the risk with higher loan-to-value products,” said Nick Chadbourne, CEO of conveyancing provider LMS.
End of coronavirus support
Beyond property-related support, other measures introduced by the Government to help households will come to an end this year. The furlough scheme is currently set to close at the end of September, while payment deferrals on mortgages will end by 31 July.
While this might make some people think twice about buying, Kaan Emin of Apply Mortgages said it could also free up some supply.
“People may well not be able to afford living in their current homes after the support from the government has ended. This will result in a flood of properties on the market and reduce the average house price down because of this influx, whereas at the moment there are not many properties in comparison to the amount of people looking to purchase.”
Woolwich peninsula is seen in front of the city skyline in Sydney, Sunday, April 26, 2021. (AAP Image/Mick Tsikas) NO ARCHIVING
Beyond property-related support, other measures introduced by the Government to help households will come to an end this year (Photo: AAP/Mick Tsikas)
The race for space: From a one-bed flat to a three-bed terrace
One of many couples making a big space upgrade during the pandemic are Kim and Ed, who bought their new home in October 2020
Kim, a teacher, and Ed, who works in finance, were already living in Finchampstead and loved the area. But when lockdown struck, their one-bedroom apartment quickly became unsuitable.
“We moved from a small one-bedroom apartment, so it was a big upsize,” says Kim.
“In our flat, our bedroom was my office, and I was sleeping surrounded by cables most nights! But we certainly don’t have that problem here; with bedrooms to spare and a spacious living room meaning the house is perfect for working from home.
“The townhouse layout suits us to a tee and there are three bathrooms, which is a welcome luxury. We also have a garden with a lovely patio, which is perfect for a small table and chairs. With a shed and a garage, we had more space than we knew what to do with – but we’ve managed to fill it all somehow!”
They viewed dozens of homes between lockdowns last year, and settled on the property in Legal & General Homes’ Finchwood Park in Finchampstead even though they had previously been unsure about buying a newbuild property.
“In the end, we bought our home because of how we felt when we walked in the door rather than because it was or wasn’t a new build,” says Kim.
Having enough space, both inside and outside, was a major plus for the couple – not least because of their new puppy.
Ed says: “The home is well proportioned; you can tell that the layout has been really considered and they have thought about how people will actually use the space – it’s exactly how we would have chosen it ourselves.
“That also extends to the development itself where all the houses are well spaced out on wide streets. That was a refreshing difference from some of the other developments we saw that had super narrow roads lined with rows of tightly packed homes.”
They will also soon have a country park nearby, and are very happy with the surrounding area.
“I go running in the local area so it’s lovely to be able to leave the house and be surrounded by fields and countryside,” says Kim. “There is also a proper sense of community and we already have a WhatsApp group set up with our neighbours.”
Ed adds: “In normal times I commute to London for work but definitely prefer to stay local at the weekends. There’s some great country pubs nearby, lots of green space and loads of sports to get involved in.”
More Government schemes?
So, with several factors including more supply and the end of the Stamp Duty holiday pointing to a cooling-off later this year, will the Government intervene again?
Pete Mugleston, managing director of onlinemortgageadvisor.co.uk, said much of what is driving house price growth is either “artificial” or “likely to be temporary”.
“Whether the value of property is still at an all-time high in the years to come may depend on what measures are introduced to replace the current crop of schemes, and what happens to interest rates in the wake of Covid-19,” he said.
“One thing is for sure, the government will do everything in its power to make sure the housing market doesn’t crash. The impact on banks and the wider economy would be significant, so it’s safe to say there is likely to be further schemes and measures to help maintain the status quo.”
Experts were mixed in their opinions on the support schemes so far.
“Overall I have been impressed with the schemes the government has put in place to support the housing market and those struggling to get out of rented housing,” said Alex Hammond of Unlocking Property. “I expect a steady growth in house prices over the next few years.”
But LMS’s Nick Chadbourne was less impressed “I suspect that the various Government schemes’ effects on the market have not actually helped the market materially. A more cautious approach from the Government when implementing new schemes would have saved the taxpayer considerable money while having little impact on activity.”