People were taken by surprise when the pandemic property boom exploded.
It’s possible to go back in time to the initial 2020 lockdown property market freeze. This was when almost all activity ceased between March and April and into May. The predictions were clear; transactions would cease and house values would plummet.
Lloyds Banking Group forecasted a 5-10% fall, Savills predicted a 10 percent drop, CEBR a 12% decline, and even Bank of England saw potential for a 16% decrease in house prices.
As we know that didn’t happen.
Nationwide’s index reveals that while house prices were expected to decline in the pandemic, they have risen instead. The average home is up £30,000 since the start of the pandemic
While the stamp duty holiday gets a lot credit for the miraculous boom, it was clear that the property market was doing very well even before it arrived.
In fact, one of the main criticisms of Rishi Sunak’s surprise tax cut on the first £500,000 of a home’s purchase price was that things were ok and he could have kept his powder dry.
My opinion is that cutting stamp duties is a good thing. However, doing it temporarily is foolish as it only triggers inflationary rushes to beat the deadline. We saw one of these spectacular ones.
It’s impossible to unpick how much of the £30,000 added to the average house price since the start of the pandemic, according to Nationwide’s index, was contributed by the stamp duty holiday.
Britain’s biggest building society said yesterday that the cost of a typical home has risen above £250,000 for the first time and house price inflation stands at 9.9 per cent.
This is a very bad thing for a country that has made it too expensive to buy homes compared with wages. (Of course, many people will be happy to have moved home.
The important question is: What happens next?
Nationwide’s chief economist Robert Gardner suggested that with the threat of a base rate rise driving up mortgage costs, we could be about to see some of the heat come out of the market.
He said: ‘A number of factors suggest the pace of activity may slow. The sharp rise in the cost to live has caused consumer confidence to drop in recent months.
‘Even if wider economic conditions continue to improve, rising interest rates may exert a cooling influence on the market, though the impact on existing borrowers is likely to be modest, partly as a result of a sharp increase in the cost of living.’
He also pointed out that homeowners are now better protected against rising rates than they used to be, with only around 20% of borrowers being on variable rates.
The rest have fixes that mean their mortgage rates won’t immediately change and are overwhelmingly also locking in when it comes to the time for a fresh deal, with approximately 95 per cent of new mortgages on fixed rates.
It is interesting to note that even though banks and building societies have pulled a number of their top mortgage deals in the past week, rates are still lower today than they were when the entire pandemic property boom began.
However, tightening mortgage conditions will cause a slowdown in the property market. The only thing that keeps it afloat is the low money that allows buyers to chase up house prices.
OBR predicts that the sharp pandemic boom peak in housing price inflation will soon be replaced by a fall in house price inflation to 1%.
As the pandemic boom fades, the OBR forecast now is that house prices will become cheaper than wages (yellow-blue lines) and less expensive than pre-boom expectations.
However, the Office of Budget Responsibility stated in its Autumn Budget documents last Wednesday that the pandemic boom could make house prices more affordable than wages.
The OBR also included house price charts showing its March 2020, March 2021, and October 2021 forecasts. Both the pandemic boom-era charts from March and October 2021 show that property affordability is improving, but getting worse faster.
This is because of the boom, which has driven forward property sales and house-price inflation. In 2022, it is expected to drop to around 1 percent, and then slowly climb up to 4 percent by 2027.
A full-blown crash would have a huge economic impact on the UK’s property-dependent economy. Lower house prices and rising wages are probably the best things we can hope for.
It would be nice to see homes get cheaper.
