UK house prices have seen an unprecedented increase in 2020 and 2021 with a current national average house price of £266,000, up £31,000 in the past 12 months. Indeed, the rise is property prices was at its highest in 17 years in June 2021 with an annual growth rate of 13.2 per cent. And, unlike the housing market peaks of years gone by, the highest price rises have not been in London or the southeast of England, but in more rural spots like Wales, Cornwall, Yorkshire and the northwest of England, the region with the lowest average house price in the country.
So why, in the midst of a global pandemic and the Brexit fallout when the UK economy has shrunk by 10% – its biggest fall in 300 years – have we seen such a hike in the cost of housing?
Why are house prices increasing so quickly?
The build-up of existing and new buyers who had been unable to proceed with property transactions during the UK’s first Covid-19 lockdown period from March-May 2020 certainly provided an initial boom to the housing market once it reopened in the second quarter of 2020. The financial incentives offered by the Government to reinvigorate the housing market and boost the ailing economy in the wake of the UK’s first lockdown peaked buyer interest substantially too and had a resultant impact on the rise in house prices.
When the Chancellor, Rishi Sunak, announced the temporary reduction to stamp duty land tax rates from 8 July 2020 – 31 March 2021 a dramatic increase in property purchases occurred throughout 2020 and, as a result, we saw a rise in house prices. In December 2020 for instance, there was an annual growth rate of 7.3%, the highest since January 2015 at that point. Since the stamp duty deadline was extended in March 2021 (with exemption for properties costing up to £500,000 until June 2021 and up to £250,000 until 30 September 2021), buyer interest and property prices remain high and steady despite the looming deadline of 30 September. Indeed, June 2021 saw the highest number of property transactions on record. One of the lowest interest rates on record has definitely helped too!
Alongside the extended reduction to stamp duty rates, the Chancellor introduced a further initiative to reinvigorate the housing market via the 2021-22 Budget, a new government backed mortgage guarantee scheme. The scheme allows homeowners who can pay a 5% deposit (as opposed to the general 20% requested by mortgage providers) to access high loan to value (LTV) mortgages of around 95% of the property price. This scheme will run from April 2021 to December 2022 and is designed to make the housing market more accessible to those who would be prohibited by higher deposit requirements.
Whilst these financial incentives have certainly had an impact on the continued rise in house prices and property transactions overall, this is not the main reason for the steep increase in house prices.
Much like any other time in recent memory when house prices have seen a rapid spike, we are seeing demand rapidly outstrip supply, particularly when it comes to spacious, detached properties which are the preference du jour for homebuyers. In contrast, the price rise for more urban properties (with London being the region with the lowest annual growth (6.3%) for the seventh successive month) and flats in particular has risen at a much slower rate, further hindered by the recent cladding crisis and the dissatisfaction with leasehold purchases and the slow pace of leasehold reform.
The Covid-19 pandemic has certainly seen many homebuyers completely reassessing what they need from their homes with space a major priority, whether is in the form of home-working space, space for the family or more rural, outdoor space on the doorstep (or all three!).
But with housing stock at an all-time low, and the possibility of owning your own home becoming a distant dream for those priced out of the increasingly expensive property market, what is the future for house prices?
Tellingly, property price growth did start to slow down in February 2021 as the original deadline for the reduction to stamp duty rates approached, and once the extension was announced on 3 March, property purchases rose by 32.2 per cent in March 2021. Showing that the tax incentive has played a big part in buyers’ decisions to purchase a new property.
Whilst many industry experts anticipate that the economy will have recovered sufficiently to keep house prices stable, we are also yet to see the impact on homebuyers of the upcoming end of the furlough scheme, the self-employment income support scheme and the grants, loans and reduced VAT offered to businesses via the 2021 Budget.
With the continued uncertainty around Covid-19 and the recovery for the UK economy, it is possible that these temporary incentives have artificially increased property prices and, as we have seen previously, there is also the risk that an influx of high loan to value mortgages can have the same impact. As such, it is important to make sure you are making your property purchase with long term goals in mind so if and when demand no longer outstrips supply and the house price bubble bursts, you don’t find yourself losing out.
For everyone to be a winner, a focus on housing supply, planning and reform of stamp duty tax, property taxes, corporation tax and arrangements for the self-employed is the most likely way to help as many people as possible onto the property ladder and keep the property market buoyant.
Why are house prices increasing so quickly? is a feature post