Is the UK’s booming housing market heading for a bust?


In April, with the UK in coronavirus lockdown and the property market frozen, estate agent Savills predicted that house prices would fall by 5 to 10 per cent in the short term.

The consensus among experts at the time was that the number of house sales would collapse.

And yet, just a few months later, the housing market is booming. House prices in the UK hit a record high last month, according to the building society Nationwide. A total of 84,910 transactions was registered in August, compared to 82,830 in February, the month before lockdown, data from HM Revenue & Customs showed.

The market has been underpinned by ultra-low interest rates. The Bank of England cut its base rate to a record low of 0.1 per cent at the start of the Covid-19 crisis in March.

Line chart of Number of monthly residential property sales (000s) showing The UK housing market has rebounded quickly since lockdown

But is the housing market boom likely to last? Two factors behind it are temporary in nature: the release of pent-up demand after lockdown restrictions on the sector were eased in May, and the government’s move in July to introduce a stamp duty holiday, with home buyers paying no tax on the first £500,000 of any transaction in England and Northern Ireland.

Buyers, particularly the wealthy, have returned faster than expected to the market, but some experts think the boom is set to peter out.

The Centre for Economics and Business Research, a consultancy, predicts a 14 per cent fall in average house prices next year, saying the market is being artificially buoyed by the stamp duty holiday.

“Throughout August, the UK housing market defied gravity yet again, with unofficial measures putting average prices at record highs,” said the CEBR. “This is at odds with the wider economic turmoil.”

Line chart of Average cost per home (£000s) showing UK house prices are at record highs

The outlook is deteriorating again. After what is expected to be a strong recovery in growth in the third quarter following the recession in the first half of the year, gross domestic product in the final three months of 2020 looks set to be hit by the resurgence of coronavirus and new social restrictions.

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Chancellor Rishi Sunak put the UK on notice of rising unemployment on Thursday after he confirmed plans to end the government’s furlough scheme. His new job support scheme is not set to provide cover for all of the estimated 3m workers still in the furlough programme, which expires on October 31.

The government’s mortgage payment holiday for homeowners struggling to keep up with their bills also ends on October 31. This could give lenders the opportunity to repossess homes, although many are expected to be lenient.

Finally, the UK and EU are striving to seal a trade deal ahead of the expiry of the Brexit transition period on December 31, but several big issues are unresolved. Without an agreement, the economy would be hit again.

“We’re going to see the bad news ramping up,” said Neil Hudson, analyst at BuiltPlace, a consultancy. “Redundancies among friends and families — when those things become real for people we’ll see the knock-on impact [on their willingness to buy properties]. Then factor Brexit on top. Is that going to start creeping back into people’s thinking?”

But it is in the spring of next year, rather than this winter, when several experts fear the housing market could experience a sharp downturn.

In March, the Help to Buy equity loan scheme, the government’s measure to support the housing market in England, will be overhauled. It will be restricted to first-time buyers, and the value of homes bought under the scheme will be capped at different prices across the regions.

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The stamp duty holiday also ends in March. The last time such a holiday was introduced, in 2008, it prompted a spike in housing transactions which rapidly fell away when the tax break ended.

Line chart of Number of transactions (000s) showing UK home sales  fell sharply after 2008-09 stamp duty holiday

The government might look at extending the current holiday, but it is far from clear whether doing so would bump up sales again. Such tax breaks are usually regarded as accelerating house purchases by people already interested in acquiring a property, rather than tempting new buyers into the market, meaning the effect fades over time.

Lenders have also become more conservative, pulling some of their highest loan-to-value mortgages, and this has cut a swath of would-be purchasers out of the market. First-time buyers have accounted for a growing number of sales over the past decade, but stricter lending criteria are likely to hurt them most.

Lucian Cook, head of residential research at Savills, predicted that house prices will plateau rather than fall in 2021, so long as those who lose their jobs can find a way back into employment.

“We see flat house prices next year, some upwards pressure in the first quarter of the year which will then come off in the second half,” he said. “What matters most is how quickly that spike in unemployment will fall away.”

Other experts are less sanguine. Mr Hudson said there was little risk of the kind of housing crash that followed the 2008 financial crisis, when prices fell 20 per cent in a little over a year, because buyers and lenders have recently exercised more caution than they did in 2006 and 2007.

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But he added that transactions were almost certain to fall next year, and prices could well follow. “There’s still a chance things peter out without a bang — but a bang looks pretty bloody likely at the moment,” said Mr Hudson.



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