On the face of it, the UK’s housing market has become entirely dislocated from the reality of the economic situation the country finds itself in. In a year when gross domestic product suffered its largest contraction in more than 300 years, house prices accelerated to notch up the highest annual growth rate in over six years by December 2020.
The ‘black swan’ scenario that has caused such economic devastation, and the huge levels of government stimulus that have been meted out in the wake of the pandemic, partly explain that contradiction. Yet it also means the prospects for the UK’s housing market are the most uncertain they have been since the 2008 financial crisis.
The July introduction of a temporary stamp duty break on properties valued at up to £500,000 in England and Northern Ireland incited a frenzy among home buyers. More homes changed hands during the final three months of last year than during any quarter over the past 13 years, according to figures from HMRC.
The deadline for the tax holiday was extended by three months to the end of June in this year’s Budget, at which point it will be restricted to properties worth up to £250,000 until the end of September. Ahead of the initial deadline, sales agreed in March stood at almost 162,000, according to TwentyCi, a record since the property data company began collating the figures in 2016 and more than a third higher than February last year.
While demand has increased as buyers look to take advantage of upfront cash savings, the rise in new homes coming to the market has not kept pace. Indeed, if buying activity continues at the rate experienced in February, TwentyCi estimates that, aside from London, the whole of England and Wales – at a regional level – has between 2.2 and 2.4 months of property stock left to sell. That leaves available stock levels at around 50 per cent below historic norms.
Bidding wars have naturally become a more common phenomena. The number of homes in England and Wales with offers from three or more buyers shot up to 41 per cent in March, according to Hamptons International, up from 24 per cent, in the same month last year and 23 per cent in March 2019. With more buyers chasing properties, average sales prices have climbed to 99.5 per cent of the asking price, according to the estate agency. That is the highest level since it began collating the data in 2009.
“Because there isn’t much choice on the market, people are having to fight it out for the homes that are on the market,” says Hamptons International head of research, Aneisha Beveridge. In Yorkshire and the Humber and the north west, buyers are having to pay at or above the asking price in order to win the home, she says.
However, it is not just the stamp duty break that has boosted home moves. Months of being confined indoors has prompted homeowners to seek more space, with demand for larger properties and gardens rising. Houses are being snapped up at a faster rate than flats, taking an average 42 days to sell versus 62 for apartments, according to Zoopla.
The shift by some companies towards flexible working on a more permanent basis has added to this, says the property portal’s research and insight director, Richard Donnell, as people recognise they no longer need to commute into the office five days a week. “I still think there’s more latent demand to move to be unlocked as people reevaluate their housing requirements,” says Donnell.
In the capital, the search for space has benefited the leafier areas of outer London, says Chestertons chief executive Guy Gittins. “The really big initial winners were the locations that were still commutable, very much still in London that have just offered better value and more space,” Gittins says. Those locations included Barnes, Kew and Richmond, he says.
Growth engines reignited?
The three-month extension to the stamp duty break and tapering of the threshold until the end of September, has renewed expectations that transaction levels will remain heightened. The anticipated end of the stamp duty break had led to a slowdown in sales price growth ahead of the original 31 March deadline. Average prices rose 1.1 per cent over the three months to March, according to Nationwide’s house price index, down from 1.8 per cent in February.
However, the stamp duty extension, success of the vaccine rollout and extension of the furlough scheme have all contributed to greater optimism, says Savills (SVS) head of residential research, Lucian Cook.
“All of that reduces the risk of a tail-off in demand as unemployment peaks and [there’s] a bit of a lull in the market,” he says. “I would say over the longer term it’s more about the expectation that interest rates are going to stay lower for longer.” The low cost of mortgage borrowing should encourage activity, he adds.
Savills raised its forecasts for average UK house price growth this year to 4 per cent, up from previous expectations of flat sales prices.
Yet beneath the bullish market statistics reported since July, some house hunters have been left behind. In the immediate wake of the pandemic, lenders pulled back on the number of mortgages at higher loan-to-value (LTV) ratios, which increased the level of deposit needed to buy a home. That has hindered first-time buyers, who traditionally have much smaller lump sums to put down on a property.
The shift in LTVs came as lenders adopted a more conservative risk appetite. Yet curtailing lending at the more in-demand part of the market was also a consequence of the capacity constraints on lenders' human resources, said head of mortgages at mortgage brokerage Trussle, Miles Robinson.
“They had to pivot so much of their staff towards mortgage payment holidays and it was a way of balancing demand, because the housing market opened in May and from there, there was just a surge of people wanting to move and buy properties,” he says.
That also meant the period of time between submission and completion of a mortgage application surged from the third quarter of last year. Some lenders increased rates attached to higher LTV products in an attempt to manage demand. Since January, processing times have started to reduce, Robinson says. However, the average completion time over the past 90 days still stands at 166 days, 22 days higher than the same period last year.
Mortgage availability is improving. The number of products at a 90 per cent LTV rose to 323 in March, according to Moneyfacts, up from a post-pandemic trough of just 72 in September. However, those with a 95 per cent LTV remain in acutely short-supply, with only five deals on offer across the market.
With first-time buyers accounting for just over a third of UK home buyers in 2019, according to Zoopla, enabling people to get on the housing ladder is vital for the sustainability of market activity.
The promise of government-backed 95 per cent mortgages could provide a boost. Yet restrictions around the loan-to-income ratio mean the chancellor’s initiative will be more useful in affordable housing markets outside London and the south east. Those wanting to purchase the average property in London – priced at just over £500,000 in January, according to the Office for National Statistics (ONS) – would still need a six-figure household income.
Will (un)affordability be the undoing of London?
While transaction numbers have staged an impressive rebound since the latter half of last year, the extent to which that has translated into growth in sales prices has differed across the country. During the first quarter of this year, the north west registered an acceleration in annual house price growth to 8.2 per cent, according to the Nationwide house price index. In contrast, the rate in London softened to 4.8 per cent.
“Affordability pressures are acting as a big drain on how much people can bid up the cost of houses in London and the south east,” says Donnell.
Indeed, given the majority of mortgage lending is capped at an equivalent of 4.5 times a borrower’s income, many of those that manage to save up the required deposit may still face difficulty in funding the rest of the purchase in more expensive parts of the country.
The average London house price was more than 12 times the median annual household income in 2020, according to data from the ONS, and almost 10 times in the south east. That compared with an English and Welsh average multiple of 7.7. Yet in regions including the north east and north west, those house price/annual earnings ratios are still below pre-financial crisis levels.
The UK capital has also faced some other unique challenges in the wake of the pandemic. The decline in tourism to the city caused by travel restrictions has led to an increase in landlords cashing in their rental properties, says Gittins. “Some landlords have decided to test the property in the market and so there’s greater stock availability in central London at the moment,” he says.
International travel restrictions have also curtailed demand from overseas buyers, who were a core source of demand for prime, inner London properties. The introduction of a 2 per cent surcharge on homes purchased by non-UK residents from 1 April, poses a further risk to activity in that market.
However, Savills’ Cook says the estate agency is “not hearing much noise” from overseas buyers about the additional tax. That could be because central London looks good value when you consider that some sales prices are 20 per cent below their peak in 2014, he says. “Particularly for dollar-based buyers, despite the fact that sterling has appreciated over recent months,” he says.
Less international interest during the pandemic has also spurred some domestic buyers in the market. “Residents are getting into the market before they see that much greater level of international competition around the corner,” says Cook.
Nevertheless, central London locations have also been a victim of the search for greater space, as homeowners re-evaluate whether the higher prices attached to properties are worth it. That shift from city centres and into suburbs and beyond has been repeated, albeit to a lesser extent, throughout the UK.
During the six months to April this year, few of the top 20 performing local authorities in terms of sales agreed were major towns or cities, according to data from Zoopla. Instead areas such as Herefordshire, East Cambridgeshire and Brentwood substantially outperformed the rate of sales in their respective broader regions.
Yet the wider exodus from cities may have been overstated. Donnell stresses that while growth multiples look impressive, the increase in moves to more rural areas is from a much lower base. “The vast majority are still looking in cities,” he says.
There are, in fact, signs the fall in demand for inner London property has bottomed out. Prime central London prices returned to growth during the first quarter, according to Savills, rising 0.4 per cent compared with the prior three months. That was the first quarterly increase since the ‘Boris bounce’ in sales prices that followed the 2019 general election.
Will the boom continue?
At the start of this year, the prospect of a 31 March cliff-edge in transactions was in sight. The tapering of the stamp duty holiday has abated that risk. A net balance of +42 per cent of respondents to the Royal Institution of Chartered Surveyors (RICS) March survey said they had experienced an increase in new buyer enquiries, the sharpest uptick since September. A positive net balance indicates more respondents have reported a rise in enquiries than those who have not.
Sales price expectations are also brighter. With supply remaining constrained, a net balance of +60 per cent of respondents said they thought sales prices would be higher in 12 months time. The renewed optimism was attributed not only to the extension of the tax holiday but also the gradual loosening in lockdown restrictions.
Chestertons' Gittins says enquiries at the start of April were 171 per cent higher than the same week last year and almost three-quarters above the 2019 level. “We [have seen] another inflection point in buyer numbers and for the last two weeks we have registered more buyers per week than we have ever registered over the last 15 years of keeping these numbers,” says Gittins. Given many of those would not complete in time to qualify for the stamp duty break, it suggests the tax holiday is not the only driver of demand, he says.
He also points to the rebound in demand at the start of 2020 as an indication that the market was already on course for a strong performance. “Before that in Q1 and the end of 2019, the market was just gathering a serious pace as the general election had been finalised and for the first time in some years the focus wasn’t on Brexit,” he says.
However, a natural easing in the ferocious pace of demand and house price rises seems likely, particularly as more homes are anticipated to come onto the market.
The rate of price growth witnessed in the latter months of 2020 was always going to be difficult to sustain over the course of 2021, says Cook. “We will see some of the lifestyle drivers just easing a little bit over the course of this year. And as the stamp duty holiday is first restricted and then removed, that I suspect will result in a bit less urgency in the market.”
Zoopla expects to revise up forecasts for transactions this year, bringing it in around the six-year average of 1.2m, says Donnell. Yet equally, “going back to normal” is not an adequate description of the situation either, he says, adding that the unwinding of furlough and reopening of international borders are risks.
Indeed, there is also the prospect of a shaky economic recovery and the anticipated rise in unemployment. Admittedly, growth forecasts for the UK economy this year were increased in March to an average 4.7 per cent, according to the Treasury, up from 4.4 per cent in February. That rises to 6.1 per cent for 2022. Unemployment expectations have also eased, with the Office for Budget Responsibility forecasting joblessness peaking at 6.5 per cent by the end of this year, below the 7.5 per cent rate anticipated in November.
The impact of unemployment on the housing market could be more closely linked to areas that are more reliant on a select number of large companies or industries, says Neal Hudson, an independent housing market analyst. “I think we’re much more likely now to see any impact being much more local rather than national,” says Hudson.
Government support measures have provided some relief from the impact of the pandemic on household finances. “Because of the furlough scheme, because lenders are offering forbearance to customers, that’s limited the number of forced sellers in the market,” Donnell says. That has also prevented falls in prices.
Mortgage payment holidays will end for all borrowerswho have taken advantage of a break of up to six months by the end of July. The Financial Conduct Authority has guided lenders to provide “tailored support” to those that have come to the end of a payment deferral, which “reflects the uncertainties and challenges that many customers are and will be experiencing due to coronavirus”. However, it remains to be seen to what extent repossessions – which the regulator had emphasised should be a last resort – will materialise later this year.
The historically low cost of borrowing is a plus for the housing market, making the cost of repayments more affordable. Yet heightened economic uncertainty has not gone unchecked by lenders. They are more heavily scrutinising applications from some individuals that are self employed, on lower incomes or who have been furloughed, requiring additional evidence that future repayments will be affordable.
Affordability is at the core of a healthy housing market. The stamp duty holiday of the past nine months has most benefited cash-rich buyers, with those purchasing homes around the £500,000 mark making the maximum £15,000 upfront saving. Yet without that incentive, the cost of purchasing homes in higher-priced regions of London and the south east is an immense barrier to many and one that seems likely to weigh on transaction numbers and limit house price growth.
In the shorter term, the design of the mortgage guarantee scheme, together with the £250,000 stamp duty holiday threshold in place in England and Northern Ireland until the end of September, means that regions such the north and midlands look best placed to outstrip their pricier counterparts. Beyond this year, there is still comparatively more room for growth.
Increasing the supply of new housing stock would provide a key to surmounting this barrier. The help-to-buy scheme, which is set to run until 2023 under tighter restrictions, has helped. Yet the market is still far short of a government target of 300,000 new homes being built a year.
The doomsday predictions of a collapse in the housing market, made in the immediate wake of the first lockdown last spring, seem increasingly unlikely to materialise as the country emerges from the pandemic. However, the indiscriminate boom seems equally unlikely to be sustained.
