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Why UK house prices are rising, and why the Government can’t afford to let them crash


Annual inflation has cooled to a five-month low and the stamp duty holiday has been tapered out, yet house prices defy predictions

House prices in most parts of the country are not affordable and they have continued to rise beyond wages in recent decades (Photo: Yui Mok/PA Wire)

By Vicky Spratt

Housing Correspondent

In August house prices in the UK once again reached a record high as the country recovered from the coronavirus pandemic. Halifax, one of the country’s largest mortgage lenders, reported that the average cost of a property increased by 0.7 per cent (or £1,789) to £262,954. That surpasses the previous peak – also deemed a “record high” – of £261,743 back in June.

Halifax’s index is the UK’s longest running monthly national house price series, going back to 1983. From this data, they calculate house price movements on a like-for-like basis, comparing each month with the same month a year earlier.

The housing market closed 2020 on another record high. According to the Office for National Statistics (ONS) average house prices went up by 8.5 per cent in the year to December 2020, up from 7.1 per cent in November 2020 to reach a record high of £252,000. This was the highest annual growth rate this country had seen since October 2014. 

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What has confounded lenders is that this has happened against the backdrop of a global pandemic and all the economic and social uncertainty that came with it. At the end of 2020, Halifax was forecasting a house price fall of between two per cent and five per cent in 2021. Meanwhile, the Treasury’s own independent forecaster – the Office for Budget Responsibility (OBR) – made a more pessimistic prediction: an eight per cent fall in 2021. 

So, what has gone on? Housing experts such as Neal Hudson, an independent analyst and commentator, and Josh Ryan-Collins, the author of Why Can’t You Afford a Home and head of finance and macroeconomics at UCL’s Institute for Innovation and Public Purpose, have consistently told me over the last 18 months that making predictions is folly.

While the UK is (on paper at least) “a strong candidate for a housing market crash”, as Ryan-Collins said in June, this was not inevitable while interest rates remained low and the market was propped up by government policy. In April, Hudson warned the housing market was already defying predictions and inflated house prices could be the new normal.

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There used to be a familiar cadence to the UK’s housing market, a seasonality. In most regions there were hot and cold periods. A housing boom of considerable magnitude would take place in the second quarter of the year, the hot season: spring and summer. This involved above-trend prices and a higher number of transactions. There would then be a bust in the fourth and first quarters, the cold season: winter. This would see below-trend house price falls and less activity. This was largely attributed to people moving home less in the winter or around Christmas.

The reassuringly predictable nature of these house price fluctuations was well-documented. It was the subject of a report from the London School of Economics in which estate agents were interviewed and agreed on the trend.

All of this has been disrupted by the coronavirus pandemic. It was in no small part aided by the Treasury’s 2020 stamp duty cut and the encouraging noises they made to lenders and buyers alike in early 2021 about government-backed 95 per cent mortgages. But we are now seeing record highs reported even though annual inflation has cooled to a five-month low and the stamp duty holiday has been tapered out. 

Will we see a crash? Will the market ever be seasonal again or is house price inflation here to stay? Hudson urges caution, both in terms of looking to the future and analysing the house price data which is reporting “record highs”. It’s important to remember that house price indices are not straightforward: not all of them use the same methodology and there is sometimes a delay in reporting data. He notes that the property rental and sales listing website Zoopla measures house prices by listed prices, not sold prices. The amount someone wants to get for their home is rarely the same as what is paid for it in the end. 

Meanwhile, ONS data reports are delayed because there is a lag in Land Registry registrations of sales which is what they measure and, beyond that, all the major indices – Halifax and Nationwide – are weighted by transaction volume. This can skew prices because not all of the houses sold will have the same value. 

Hudson adds that since last summer there was a big shift towards higher value transactions – so people purchasing more expensive houses – which “could lead to higher reported house price growth”.

Right now, the key takeaway is uncertainty. “The big unknown is how much of the current activity has been because of the stamp duty cut and how much of it is down to the race for space as people move to bigger homes or the reevaluation of property as people increasingly work from home,” Hudson says. 

In August, the Resolution Foundation released a report arguing that the current house price boom was not caused by the stamp duty cut at all and that the policy was a “wasteful” missed opportunity to cash in on a fundamental shift. 

The think tank believes that house prices will keep rising because of low interest rates and the way that the pandemic has changed what people are looking for in a home: more space, a garden, a less urban location. 

According to their analysis, HMRC lost out on around £4.4bn in taxes in England and Northern Ireland because of the stamp duty cut.

Hudson says it has always been his view that the stamp duty cut was only part of the story, but he remains cautious. “There is still a lot of economic stress that could impact things,” he explains. “The end of furlough could have an effect and so there remains a great deal of uncertainty.” In other words, there is still potential for prices to fall or, at least, stop rising at the rate they currently are. 

“At the moment, according to the Nationwide index, it’s looking like house prices could end up eight per cent or nine per cent higher at the end of this year if they continue to track where they are at the moment, which is really quite massive.”

However, what we do not and cannot know is whether we are witnessing structural changes in the housing market which will see record upon record high, or the ripple effects of the race for space sparked by the pandemic which will only last a year or two. 

Long-term, we are in a bind. House prices in most parts of the country are not affordable and they have continued to rise beyond wages in recent decades. Yet, we cannot afford a house price crash because it would impact those who have taken on the most debt the worst, pushing them into negative equity and creating dire consequences for the economy because Britain relies on house prices to keep financial services moving. The subject of housing wealth is controversial, which means any solutions to this dilemma will likely be equally so.

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