UK house prices fell by 0.5% in June 2021 for the first time since January according to Halifax, most likely due to concerns about the ending of the Stamp Duty Land Tax holiday in September, which had the nil rate band halved from £500k to £250k on 01 July. House buyers have been making SDLT savings of up to £15,000, however, from 01 October the market then reverts back to the standard nil rate band of £125,000, when many expect the market to cool.
In 2021, more than 1.5 million homes are expected to change hands, a jump of 46% against 2020, according to Zoopla, on course to making it the busiest year for 14 years. With talk of the SDLT policy having created a ‘bubble’ due to creeping concerns about the durability of the economic recovery, does this indicate a forthcoming ‘burst’ for property prices?
Currently, speculation about the housing market is particularly high, whether for financial reasons – investments and business opportunities; general interest in the value of your own home; or as a gauge for potential rent increases if you are a landlord or living in a rented property.
Since the nation’s finances have been observed, the cyclical phenomenon of ‘boom’ – where the economy is growing has always been followed by a ‘bust’ period – where the economy shrinks, manifesting itself in times of hardship for many families.
Government interventions have the power to shape or guide the economy in many ways, but our unique set of circumstances and moving factors render many predictions to be a shot in the dark. Explaining the UK’s current state of play and analysing the history of what has occurred before, may go some way to predicting what will happen next.
Lockdown effect shifts
The drastic ‘lockdown’ period in 2020 where stay at home and work from home orders were in place, can be said to have influenced a surge in demand for larger homes as people sought more space for homeworking; with detached house prices rising in value by more than 10%, or almost £47,000 in cash terms, faster than any other property type over the past 12 months.
The year of the pandemic also started another trend, where houses outside of London, with more space and gardens, became more desirable, due to the shift to homeworking. According to the ONS, in May 2021 London was the region with the lowest annual growth (5.2%) for the sixth consecutive month.
There is currently a massive demand for houses however, with limited supply, the effect is pushing up prices to record levels and leading to record lows in available stock for sale. Many are calling urgently for the Government to encourage more new homes to be built to ease the housing crisis.
Has the SDLT holiday created a bubble?
Housing bubbles generally begin with a jump in housing demand, despite a limited supply of housing available. It can be made worse if speculators buy up properties for investment purposes, pushing up prices further. A bubble is only created though when a significant number of market participant’s i.e. buyers, borrowers, lenders, builders and investors take excessive risks.
Forces which contribute to a housing bubble ‘burst’ consist of a drop in demand, a rise in inflation and interest rates or a downturn in the economy; so it follows to look at a range of related causes of these to analyse the risks.
Coronavirus circulation risk
On the day lockdown restrictions were lifted on 19th July, ‘Freedom day’, the daily tally for new infections was almost 40,000. Although the rate of death is comparatively low due to the ‘success’ of the vaccination programme, the Government hasn’t ruled out another lockdown that would further affect the time it takes to recover financially and housing demand to continue without the SDLT holiday. There is also the risk that as the coronavirus circulates it could potentially mutate into a more lethal form, therefore, the predicted economic rebound activity still remains subject to public health restrictions.
The economic impact of the coronavirus pandemic
The Office for Budget Responsibility has reported that the UK’s coronavirus rescue package cost 16.2 percent of GDP over 2020-21 and 2021-22. To give this some perspective it equates to almost ten times that provided during the financial crisis in 2008-09 and 2009-10. After the United States and New Zealand, this was the third largest amount spent among 35 advanced economies.
The total cost of past and planned COVID-related government interventions now amounts to nearly £350bn.
KPMG predict that from 2023 – 2024, public finances will enter a repair phase with potential higher taxes on the horizon. If, for example, the Government chooses to tax investment properties or second homes more severely, this will no doubt cause a drop in demand for properties.
An extreme case of a loss of investor confidence
Typically the stock market and economic performance are aligned. When business activities or outputs in a country are growing the ‘Growth Domestic Product’ GDP figure is high and investor confidence is also high, leading to more investment in the stock market. However, the opposite is also true and if a combination of factors aligns and there is a loss of investor confidence, this could prompt consumers to tighten their belts and demand for houses to fall as per historical recessions.
End of furlough and the Unemployment rate
In October 2021, the furlough scheme is due to come to an end with Government support for workers wages no longer available. If all those on furlough at the end of March were reclassified as unemployed, the unemployment rate would increase to a staggering 17%.
In KPMG’s Economic Outlook forecast published in June 2021, they expect unemployment to peak at 5.7% by the end of the year, as the furlough scheme ends it is predicted that the majority of workers will be reabsorbed into the labour market and remain in employment after September 2021.
KPMG forecast the unemployment rate to average 5.1% in 2021, with a peak of 5.7% in the three months to December 2021.
Furlough aimed to keep firm’s liquid and solvent and employees attached to their employers – and many agree it should achieve its purpose. Therefore, in isolation, having no significant impact either way on house prices.
The sensitivity of Inflation and interest rates
Inflation is the measure of rising prices of goods (e.g. food) and services (such as Council tax) over time in an economy. If demand for goods or services is high and supply is low, this pushes up prices, as has recently been seen in the housing market. This is called demand-pull inflation.
Cost-push inflation occurs due to the increases in the cost of raw materials and wages. Due to the Suez canal crisis, Brexit and other factors, this is also occurring in the UK economy at the moment.
The Office for National Statistics (ONS) reported that the Consumer Prices Index (CPI) (measured by keeping track of a standard basket of supermarket goods) rose by 2.5% in the 12 months up to June 2021, which is significant as it has jumped to its highest level for almost two years and is above the Bank of England’s target rate of 2% per year.
If inflation gets too high, the real value of your money falls, so the cost of living and doing business goes up for everybody. To control inflation, the Bank of England has the power to increase interest rates, which ‘dampens’ the economy as it costs more to take out loans and, most relevantly, mortgages.
The rise in inflation is an indicator – but not necessarily a fact – that there is going to be a shift or turmoil in the financial markets or the economy.
KPMG has reported that the UK economy ‘could see rapid economic growth over the next two years and also that ‘there is still a significant level of slack which would prevent higher inflation from taking hold’. They anticipate that to allow the economy to fully recover, the Bank of England will keep interest rates at current levels for approximately two years.
Even if rising inflation does occur, this scenario does not favour savings in the bank, so people are more likely to purchase property and other goods that will hold their value.
Household savings
Throughout the pandemic, KPMG has estimated that households have accumulated savings in excess of £168bn. To give a comparison, at the end of 2020 Household savings were around 16% of disposable income, having peaked at 26% in Q2 of 2020.
There is, however, a large percentage of low-income households with high levels of debt (including unsecured debt) for whom small increases in interest rates could make a material difference to their disposable income and spending power. It’s estimated by the Financial Conduct Authority that a quarter of all adults in the UK have ‘low financial resilience’ – who are at risk from job losses with the end of the furlough scheme.
In addition, the Bank’s own research suggests small rises in interest rates could contribute to falling house prices as property suddenly becomes less attractive to investors compared with safer assets like government bonds.
However, the general consensus amongst economists is that household debt is lower relative to incomes and Banks are also better capitalised than they used to be, following changes that were made to the Banking system in response to the 2008 crisis. A fall in the value of housing – which Banks hold as collateral against their mortgage loans, will now be less likely to impact lending activity.
The Bank of England has kept interest rates low, effectively encouraging people to borrow more as the cost of paying back loans is relatively low compared to in the past.
Brexit
Leaving the EU has brought about a mountain of challenges for the UK Government and businesses. There are various temporary mitigation measures in place which are scheduled to fall away at different times. However, in July 2021 there’s no shortage of reports of labour scarcities in various industries from logistics, social care and farming which is affecting supplies. We do not know if Brexit may cause serious trading problems or even civil unrest if further issues arise, which could reduce demand for properties.
Construction Activity
In June 2021, the IHS Markit/CIPS UK Construction PMI rose to 66.3, signalling the strongest rate of construction output growth since June 1997 following the reopening of the UK economy.
To date in 2021, house building activity has increased at the fastest pace since November 2003 whilst commercial building work output rose the most since March 1998. In addition, civil engineering activity growth remains strong overall. The pace of job creation remained among the fastest seen over the past seven years.
However, the purchasing price of building materials is also rising at a record pace for a number of reasons, namely due to the increase in demand for homeowners upgrading their properties, the Suez canal backlog, the shortage of HGV drivers and the delays with customs paperwork and a backlog of supply issues due to the pandemic. Suppliers’ delivery times have lengthened to the greatest extent since the survey began. It seems there are severe shortages of construction products and materials which are pushing up the costs of building and workers’ wages.
Summary
Whilst UK house prices rose at the fastest rate in the first half of 2021, they have also fallen slightly in June 2021 as the stamp duty holiday ended. The speed of growth may be set to slow, but many remain optimistic about levels staying relatively stable due to high demand and low supply.
Rishi Sunak, Finance Minister has predicted that Britain’s economy will return to its pre-Covid level by the middle of 2022. With the furlough scheme ending in September 2021, there will be an inevitable rise in unemployment, however, there is evidence from around the world that labour markets can recover quickly.
In 2020, the UK suffered one of the deepest recessions among advanced economies, with UK GDP falling by 10 percent as a whole, twice the advanced economy average. However, with the vaccine rollout advancing at speed and businesses that have survived the pandemic have now adjusted to the new normal, many economists are optimistic.
So while output after the 2008 financial crisis did not return to its pre-crisis level for more than four and a half years, the KPMG latest forecast assumes it will regain its pre-pandemic level by the middle of 2022, just over two years since coronavirus arrived in the UK.
With more money moving around more quickly than before and some goods and services being in shorter supply, this will increase the price of nearly everything, including housing prices, meaning inflationary pressures are a real red flag to watch.
However, if interest rates remain low, the abundance of buyers will keep properties moving. When the SDLT holiday ceases in September, the lack of supply and strong demand for properties should ensure properties continue to hold their value, if not increase slightly, for the next couple of years at least.