Despite the UK entering its largest-ever recession this year, with the economy shrinking by more than 20% in Q2, house prices have shown strong growth, rising by 5.8% year-on-year to reach a record high of £227,826 in October 2020, the biggest annual rise in almost 6 years. The UK property market, which was brought to a sudden halt with the introduction of a national lockdown in March, has displayed a robust recovery since reopening in May, driven by various government schemes and record-low interest rates. However, with many of these policies set to be revoked in the coming months, and as the UK enters a second national lockdown, can this trend be sustained?
The impact of COVID on the property market
With the introduction of the national lockdown in March, the UK government practically suspended the country’s property market, stopping estate agents from marketing new homes and banning property visits while stay-at-home measures were in place. This prevented any new transactions from taking place after the current round of pending completions, causing property sales expectations to drop to their lowest level in over 20 years, with the government estimating that 450,000 housing moves were delayed or canceled altogether as a result.
Even when property restrictions were lifted on May 13th, lower incomes and reduced confidence in future finances meant that 41% of would-be home movers had suspended their plans, according to property website Zoopla. For those still interested in purchasing a house in this period, plummeting numbers of approved mortgages, particularly at higher loan-to-value ratios, made financing these moves increasingly difficult, demonstrating the indirect manner in which the pandemic has affected housing demand, beyond the effective closure of the industry in March.
Government initiatives trigger strong property demand recovery
Since the property market reopened in May, demand for housing has displayed a robust recovery, underpinned by record-low interest rates of 0.1%. This trend was accelerated in July with the introduction of the stamp duty holiday, leaving 140,000 more buyers currently in the queue to complete their home purchase compared to the same period last year, in order to finalise the purchase ahead of the deadline. Under the scheme, stamp duty will not need to be paid on the first £500,000 of the property transaction value in England and Northern Ireland, up from £125,000 under regular circumstances, saving buyers up to £15,000 on home purchases. Average house prices have shown strong growth since the introduction of the scheme, particularly in August, where the 2.0% monthly increase represented the largest rise in 16 years. This demonstrates the impact that the stamp duty holiday, alongside other government initiatives such as the furlough and mortgage holiday schemes, have had in releasing pent-up demand, after the industry was shut off completely during the early periods of national lockdown.
The loosening of the demand accumulated saw the number of approved mortgages in the UK reach their highest levels since 2007, rising by 7.0% month-on-month to reach 91,500 in September, significantly above the expected 76,000 according to a consensus of economists polled by Reuters. Transaction volumes have risen greatly as a result, with 418,000 sales, worth a total of £112bn, currently in the pipeline. The largest increases in year-to-date sales volumes were experienced in the South-East region and in London, which are up 15% and 12% respectively, considerably above the 3% national average.
Surging house prices – a bubble waiting to pop?
While housing market activity showed a strong recovery in the short-term due to the release of built-up demand, with the announcement of a second national lockdown and many of the underlying factors driving this growth being temporary in nature, the current trend may be unsustainable in the longer term. The stamp duty holiday, one of the most notable drivers of increasing property demand in recent months, is set to expire on March 31st 2021, with some analysts warning that it has artificially buoyed house prices, creating a mini house bubble. The last time a similar tax break was introduced, in 2008, it prompted a spike in housing transactions that rapidly fell once the scheme ended. The Centre for Economics and Business Research predicts that the average house prices will fall by 14% next year upon the scheme’s completion.
The government’s Help to Buy equity loan programme, another measure to support the housing market in England, is also due to be revised next year. From April 2021, the scheme will be restricted to first-time buyers and is set to be eradicated completely 2 years after. With many of the government initiatives driving the surge in demand set to be discontinued, and the second national lockdown, which comes into action on November 5th, expected to have similar adverse effects on consumer confidence to the first lockdown, the record-breaking growth of house prices and property transactions experienced in recent months are likely to merely be temporary phenomena.