When will the house price boom end?

That UK house prices are rising at the fastest rate in almost six years as the UK faces the worst recession in more than 300, is a contradiction that few would have predicted during the depths of the spring lockdown. For home buyers, sellers and investors in publicly listed housebuilders, the outlook for the country’s housing market is arguably more uncertain than it has been in more than a decade.

Government stimulus has been a major driving force behind the boom in activity, with the temporary raising of the stamp duty threshold attracting buyers to the market with the promise of up-front cash savings. Almost half of home buyers said the stamp duty break was the most attractive incentive in moving, according to a recent survey by Barratt Homes and research partner GoodMore Global. 

Just over 105,600 residential transactions completed in October, according to figures from HMRC, the highest level since 2016 and making it the busiest October in at least a decade. Such has been the demand from buyers looking to capitalise on the stamp duty holiday before the 31 March deadline, that the industry has struggled to process transactions, causing the average time taken to complete a deal to rise to as much as 17 weeks, according to research by Legal & General Mortgage Club.  

It is not just owner-occupiers that have flooded the market. There has also been a surge in buy-to-let investors flipping houses – buying and selling within a 12-month period – according to research from Hamptons International.  

That is despite rental growth slowing in some parts of the country and even declining in London, as more short-let properties have made their way to the long-term lettings market in the wake of the pandemic. “They have to have a longer, mid-term view on the market because at the moment the rents being generated are 10-15 per cent less than they might have achieved last year,” says Guy Gittins, chief executive of London specialist estate agency Chestertons.   

However, many housebuilders and other industry experts argue that the boom in demand and sales prices is likely to abate in 2021 as economic conditions bite. Zoopla forecasts the growth rate at1 per cent, with the east and north-east of England recording the weakest rises, while real estate services group Savills has forecast flat prices before a return to 4 per cent growth in 2022.

“The range of possible outcomes for next year are probably the widest they ever have been,” says Residential Analysts founder Neal Hudson. 

The rate of unemployment rose to4.8 per cent during the third quarter, according to the Office for National Statistics, a 0.9 percentage point rise on the comparative period last year. The Office for Budget Responsibility forecasts that this will rise to 7.5 per cent next year as furlough support is withdrawn. A further increase in unemployment could force homeowners to sell, weighing on broader property prices. 

However, that will partly depend on the approach lenders take towards repossessions. Borrowers have until 31 March to apply for a six-month repayment holiday and will be able to extend existing deferrals to 31 July. Beyond that, lender behaviour is more uncertain, although the Financial Conduct Authority has guided the industry to offer borrowers “tailored” forbearance measures when the payment holiday comes to an end. 

It is also worth remembering that mortgage interest rates are historically very low, says Mr Hudson. He argues that it’s also possible that the rise in sale prices could continue. “If we get a vaccine that works we could begin to see the country recover and house prices could continue their upward trend,” he says. “What’s more likely is we’ll probably see prices rise where people want to live and perhaps prices stagnating and falling where people only really have to live.”   

If a slump in sales prices does materialise, or even just a slowdown in growth, could that be fortuitous for those looking to get onto the housing ladder? That’s likely to depend on whether the availability of mortgages, particularly at the higher end of the loan-to-value product range, returns.  

Either a lender or a borrower be

To some, the UK mortgage market is having a goldilocks moment. “I think the housing market probably has affordability levels that are as good as they ever have been,” argues Nigel Terrington, chief executive of buy-to-let lending specialist Paragon Banking (PAG).

Current evidence from the Bank of England provides decent support for this view. At the end of September, the outstanding value of all residential mortgage loans stood at £1.53tn, an increase of 2.9 per cent in 12 months. Although gross advances fell in the third quarter, the value of new mortgage commitments to be advanced in the coming months climbed 6.8 per cent to £78.9bn. The share of owner-occupier house purchases also edged up in the period to 55.8 per cent, from 53.2 per cent in the third quarter of 2019.

In aggregate terms, then, buyers appear to have shrugged off above-inflation house price rises and a sharp economic contraction, and have instead decided to take on more mortgage debt. Over time, that’s clearly unsustainable. But anyone concerned with the current trajectory need only look back to 2007 for a much more frayed picture of mortgage affordability (see table, left). “Borrowers could afford higher rates,” conclude analysts at UBS.

It’s arguable whether comparisons with the high watermark for UK household indebtedness should offer much reassurance on the stability of the mortgage market. From a prospective house buyer’s point of view, it is also debatable whether affordability really has improved over the past year.

For one, unemployment is rising, freezing out greater numbers of would-be buyers. A contraction in the proportion of higher loan-to-value mortgages means deposits need to be bigger, even if the cut to stamp duty is a help to many. Added to this, the average residential property is more expensive, and the proportion of mortgages with an interest rate less than 2 per cent above bank rate has fallen from 84 to 74 per cent.

Of course, the context for this is a central bank rate of just 0.1 per cent, down from 0.75 per cent just prior to the pandemic hit. This suggests mortgage lenders haven’t completely swallowed the margin pressure, particularly as one might have expected the opposite effect from an 80 per cent drop in the highest loan-to-value mortgage products. Surveys by the Financial Conduct Authority also show the proportion of mortgages with interest rates 2 to 3 per cent above bank rate has more than doubled to 20.3 per cent.

Indeed, at the end of September, the average mortgage rate stood at 2.13 per cent – low by historical standards, but down just 27 basis points in a year, when the Bank of England was paying deposit holders 65 basis points more. Banks appear to be holding the line when it comes to their profitability, however slight.

Looking to 2021, will mortgage providers ‘maintain discipline’ – to use analyst jargon – and resist the urge to re-start the interest rate dogfight of the past few years?

While enduring credit risks suggest they will, the ultimate answer will depend on what happens after the stamp duty holiday ends. Although this should free up lender capacity and smooth the approval process, quite how much mortgage demand might drop off at the same time as a vaccine is rolled out is difficult to say. On balance, it’s not unreasonable to expect interest rates might fall in the second half of the year – especially if the proportion of mortgages in arrears holds below 1 per cent, as it has done in 2020.

The other big unknown is whether the Bank of England decides to dip its toes into negative interest rate waters. Here, it is far from clear how banks’ infrastructure or deposit bases might cope with the latter change, or how this in turn would affect the mortgage market. For now, though, the possibility of a UK lender offering a 10-year home loan with a 0.5 per cent negative interest rate – as happened in Denmark in 2019 – seems remote.   

UK household debt