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Can the house price boom last?

Buyers have flooded the UK property market since the stamp duty break, but for those considering purchasing a new home it could pay to wait
Can the house price boom last?

After her second property purchase fell through in a matter of weeks following the outbreak of the pandemic, Hannah, 27, decided to temporarily put her homebuying ambitions to one side. “The supply of one-bedroom flats in London is poor and prices are still too high as they price in the post-lockdown bump,” she says. “I read reports that prices are likely to crash in a year, so I thought it would be sensible to hold off and try to secure a bargain then.” 

House prices surged to a record high in August, defying industry predictions made when the housing market was placed into lockdown earlier this year. That has diminished a would-be homebuyer’s bargaining power, with the price achieved on the average home in England and Wales reaching a record 98.7 per cent of the asking price in August, according to data from Hamptons International. 



Yet with the pace of economic recovery uncertain, patchy availability of mortgage finance and several government stimulus measures due to end in March, gauging whether activity and prices are nearing a peak has become increasingly difficult. For anyone thinking of buying a property, the core question is whether to take advantage of the up-front saving on stamp duty costs now, or hold off in the hope of getting a better deal next year and potentially averting a market crash.

There are a multitude of driving forces behind the post-lockdown market boom. When the government effectively placed the housing market into deep freeze at the end of March, what followed was a period of almost two months where property viewings, in-person surveys and moves could not take place. That not only created a natural bottleneck in the supply of properties making their way to the market, but also pent-up demand, partly due to some people re-evaluating their living situation after spending weeks confined to their homes.  



In the immediate aftermath of lockdown some buyers may have also been tempted into the market by the belief that prices would have fallen, argues Capital Economics property economist, Hansen Lu. “Actually buyers may have come onto the market with the expectation of a better deal,” he says. That is perhaps unsurprising given that national house prices declined for the first time in more than a decade in May, according to the Nationwide House Price Index, in what was the first indication of how the market had performed since the market reopened. 

The about-turn in sales prices came in July. It was chancellor Rishi Sunak’s announcement that he would be raising the threshold for stamp duty on residential house purchases in England and Northern Ireland to £500,000, from £125,000, that has truly lit the touchpaper within the market. Homes priced under £500,000 are being sold on average at slightly above the asking price, for the first time since March 2008, according to Hamptons International, when easy access to mortgage finance fuelled demand.  

The stamp duty holiday has tilted the odds more in the favour of sellers. “My view is that if you’re going to sell after the tax break, bring it forward, it makes no sense to sell after that,” says Dorian Gonsalves, chief executive of estate agency Belvoir Lettings (BLV).

Housebuilders including Redrow (RDW) and Barratt Developments (BDEV) have also reported that the looming restriction of the help-to-buy scheme to first-time buyers, as well as the imposition of regional price caps, from the end of March has contributed to a sharp uplift in enquiries. 

While more properties are making their way to market, that has been outweighed by the surge in demand. A net balance of 46 per cent of respondents to the Royal Institution of Chartered Surveyors (RICS) August survey reported a rise in seller instructions, but that compared with 63 per cent of reporting an increase in buyer interest during the same month.

That imbalance has led to rising competition for homes, with almost a third of those on the market in August receiving offers from three or more buyers, according to the Hamptons International data. “If they’re all competing for the same properties, that's going to push up prices,” says Neal Hudson, an independent housing market analyst. “What is not clear is how much of it is delayed activity from lockdown and how much is new activity.”  



Boom time – but not for all

Yet beneath the reports of a housing boom lies a divided market. Across every UK region, selling activity among wealthier demographics is higher post-lockdown than the five-year average, according to research by Zoopla and CACI. That is in contrast to less affluent sections of the population, where activity has fallen. 

The restricted supply of mortgages at higher loan-to-value (LTV) ratios – 90 per cent or more – means the odds have been stacked against buyers that are not sitting on a sizeable cash deposit. More often than not, first time-buyers fall into this category. Potential savings on offer from the stamp duty relief are typically far outweighed by the additional level of deposit needed to compensate for lower LTV mortgages. In any case, those tax savings are limited by the fact that first-time buyers were already entitled to relief on the first £300,000 of a property’s value, although for purchases over that level it does reduce up-front costs.



For first-time buyer Hannah, her first home purchase fell through after the bank refused to lend based on the fact the owner-occupier rate was not high enough. “The split was 50-50, and the estate agent said at any other time it probably would have been approved,” she says. “They said I would probably be able to get it if I boosted my LTV from 90 to 85, but I just didn't have the money.”

Normally a reduction in first time buyers is good for the rental market as they stay in rental accommodation for longer. But this time around it may be different for some major cities, argues Mr Hudson. “You have got questions over whether demand is moving away from city centres and whether overseas students will come,” he says. 

In London, the post-pandemic shift in demand for rental properties is most stark. A reduction in tourism has led to more holiday lets being put up for long-term letting, with increased supply and wavering demand making it the only UK region where rents have fallen in recent months. That makes the region less appealing for buy-to-let investors. 

Indeed, the desire for more space and access to greenery, along with more employers embracing flexible working, has meant that demand for homes in some commuter towns has leapt ahead. Commuter towns in the south-east of England have seen the biggest annual rise in demand since the stamp duty announcement, according to Rightmove. 


When will the good times end?

The first test for the market will come when the government’s furlough scheme finally draws to a close at the end of October, when a fresh wave of redundancies has been anticipated once employers are forced to bear full staff costs. The unemployment rate has already steadily risen, reaching a two-year high of 4.1 per cent during the three months to July, according to the Office for National Statistics, after a further 695,000 workers were laid-off. 

The impact on demand will be fairly small at the end of the furlough scheme, argues Mr Lu, given that the difficulty in obtaining mortgage finance has meant those on the furlough scheme were unlikely to have been considering buying a home. “One thing that might affect it, [is] a modest increase in forced sellers,” he says.

The low rates attached to mortgages will make repayment easier when mortgage holidays come to an end on 31 October. But if there is a marked spike in unemployment then even that cost could become too much to bear. House prices in regions that have a greater reliance on industries devastated by the pandemic, such as tourism and hospitality, will grow more slowly next year, according to forecasts by Savills (SVS). 

However, the extent to which forced sales materialise will ultimately be determined by the approach lenders take towards those having difficulty making remortgage payments, says Mr Hudson. “I think there is going to be a huge amount of political pressure to not repossess, for people that have lost their jobs,” he says. That could mean we may see a slightly weaker impact of unemployment on sales prices than after the 2008 financial crisis, he adds.  

Yet even if a sharp increase in unemployment levels does not slow the market, the consensus among housebuilders and other industry experts is that the end of the stamp duty holiday on 31 March will. 

“It’s inevitable that if the stamp duty holiday does end, and we are trying to press the government to think long and hard about it, we will have a temporary hiatus in the market,” says Redrow executive chairman, John Tutte. The government needs to concentrate on the benefits of a buoyant housing market to the wider economy rather than lost revenue from stamp duty receipts, he argues. 

If the tax relief has accelerated peoples’ decision to buy a home, it may result in a smaller pool of individuals looking to move next year. “When you see a spike with a tax change in the property sector, it doesn’t necessarily increase or decrease the amount of transactions in a year, it just changes the time these transactions happen,” says Mr Gonsalves.  

The fact that activity is being driven by those with larger cash deposits may also be an impediment to the rush in activity continuing, if mortgage availability does not improve. “There will be a limit to how long these buyers can sustain the market,” argues Mr Hudson. “My initial approach would be very cautious,” he says for those considering purchasing a home now. “I’d be worried that March next year could look a little bit like 1988,” he adds, referring to the cliff-edge created by then-chancellor Nigel Lawson’s announcement that two unmarried people purchasing a property would no longer both be able to claim mortgage interest relief. A sharp rally in prices was followed by a crash. However, the current market is without the sky-high interest rates of the late-1980s, which made repayments unmanageable, adds Mr Hudson. 

So if, as seems likely, demand does subside, then there is the chance that buyers may be able to negotiate a better discount against the asking price, at the very least. But potential buyers may also want to consider the true level of any saving that they stand to make by taking advantage of the stamp duty relief, in judging whether that is enough to compensate for the risk of a sizable fall in sales prices or of over-paying. 

Higher average house prices mean the savings for those in London and the south-east are far greater than in other UK regions. For instance, in the north-west and Yorkshire and Humber, the amount saved on the average house purchased in July due to the tax relief was less than £1,000, according to data from Nationwide, equivalent to less than 1 per cent of the average sales price in both regions that same month. 

Average stamp duty savings (£)*
Outer Met8,226 
Outer SE4,147 
S West2,570 
E Anglia2,113 
W Mids1,392 
E Mids1,256 
N West904 
Yorks & H757 
N Ireland369 
Purchase PriceFirst-time buyerHome mover
*Based upon July sales prices
Source: Nationwide 

However, for those looking to stay in a property longer-term, a potential blip in house price growth over the next year may be manageable, says Hamptons International head of research, Aneisha Beveridge. “As long as you’re being sensible in your purchase and you’re willing to ride out any storm,” she adds. 

The vast differences in forecasts for where house prices will end the year highlights just how difficult it is to predict to the extent to which forced sellers will emerge and buyers will be able to barter down prices after March. While the Centre for Economics and Business Research is anticipating a 14 per cent decline in house prices next year, Knight Frank is forecasting a 1 per cent increase.