Bars are closing. Restaurants are seeing bookings cancelled. Retailers are worried about the impact of tightened Covid-19 restrictions on their businesses in the run-up to the crucial period. Everywhere there are signs of an economy rapidly losing momentum after its summer growth spurt.
Everywhere apart from the housing market. There demand is booming, with the Bank of England reporting that mortgage approvals in September were the highest since 2007, the year the last crisis started.
Stronger demand for property is feeding through into higher prices. The Nationwide building society said in its monthly report that prices rose at an annual rate of 5.8% in October, the highest house-price inflation in six years.
There are two big questions about what Martin Beck of the consultancy Oxford Economics calls “a very peculiar housing boom”: what is causing it, and how long will it last?
The answer to the first question is that a bunch of factors have come together to boost activity. For a start, the housing market – like much of the rest of the economy – went into deep freeze in the spring, normally the time when house hunters are out in force. When restrictions were lifted, there was plenty of pent-up demand to tap into.
Rishi Sunak did his bit to keep the market hot by announcing a temporary reduction in stamp duty in his July mini budget. Past experience, the pre-announced end to double mortgage relief in 1988, for example, shows that the British public does not need much encouragement to buy property, and a stamp duty exemption for homes worth up to £500,000 is quite an incentive to bring forward purchases.
Beck also makes the point that the property market has been insulated from the wider economy’s troubles because the job losses that have been seen so far have been concentrated among the young, who tend to be renters not owner-occupiers.
The answer to the second question – how long before the market comes back down to earth? – is simple: not all that long. The Nationwide itself injected a strong note of caution into its statement accompanying news of the latest house price rise, noting that the outlook remained “highly uncertain”.
It warned that activity was likely to slow, perhaps sharply, over the next few quarters if the expected increase in unemployment materialised, especially when the stamp duty holiday comes to an end in March.
What the chancellor’s tax break has done is to bring forward house purchases that would have taken place anyway, leading to a bunching effect. The flipside of that is a drop-off in demand from next spring onwards.
That, in itself would not be enough to lead to a full-blown housing market correction. For that to happen house buyers have to face severe difficulties paying their mortgages, either because interest rates go up sharply or because they are losing their jobs.
With interest rates at rock bottom levels and certain to stay there, the first of these is not a threat. The second, though, most certainly is.