According to mortgage provider Halifax the average price of a UK property is now £273,000, a record high level.  Housing data, based on the rate of price change to end September and released at the end of November show UK house prices registering their strongest 3-month growth in 15 years.

Why Have Prices Been So Strong?

One of the principal reasons fueling the housing market is a shortage of available properties. This, together with strong demand from first-time buyers and ongoing support provided by historically low mortgage rates have pushed prices higher.

In our previous article, UK Housing Market – Cooling Down or Slumping?, released mid-September, we shared a chart showing the upward trajectory of house prices. Strangely, and against the recent trend it contained a very sharp dip in prices during July -hence the question we posed in the title of our article.

At that point, we explained, the dip was a function of solicitors intimating to buyers in July that house transactions might not be concluded in time for the deadline to qualify for stamp duty exemption. This caused transaction levels to dip and created speculation that the property market was set for further falls. However, we concluded our article saying, “we do not buy the idea that house prices will encounter sustained price declines”.  With this fresh in our thoughts, we decided to take another look at the housing market, to see what has happened since we last wrote on this topic.

A good way to highlight what has changed is to use the same chart we shared last time but updated to include the most recent price data; to end September. As you can see a from the area highlighted a very strong bounce back has occurred.

According to the ONS, after the dip in July a big rise in property transactions has taken place. The seasonally adjusted number of transactions in September 2021 increased to 160,950, 67.5% higher than in August and 68.4% higher than a year earlier. This occurred as the last remaining stamp duty tax holiday came to an end on the 30th September 2021.

Will the Property Shortages Continue?

A lack of properties for sale has further bolstered prices within the housing market. Estate agents have reported the lowest levels of available homes to buy that we have seen to date. Average stock levels on surveyors’ books dropped to levels not seen for over 40 years in October, according to the Royal Institution of Chartered Surveyors. Severe shortages of quality housing and the wide availability of cheap finance means that fundamentally, demand is exceeding supply and consequently house prices continue to rise. When and if this may change is a key unknown.

The ‘Race for Space’

However, in what may be a final leg of the race for space, the baton has been passed to first time buyers. Individuals who are taking their first steps onto the property ladder are playing an important role in driving activity, with annual price inflation for first-time buyers at 9.1% compared to 8.8% for home movers.

Demand from first timers means the price of flats is now outpacing the rise in prices of larger homes which were snapped up earlier in the pandemic. Once prices start to rise quickly, anyone trying to get on the property ladder starts to feel the pressure that unless they buy soon, prices will rise too far out of reach, encouraging further demand. One of the terms to describe this is fear of missing out or FOMO to use the acronym that has been coined.

What Happens As We Move Forward?

Clearly, house prices have advanced significantly, however, there are several headwinds pushing against prices. For example,

  • House price growth has been outpacing income growth by a significant margin. As a result, homes are less affordable than pre pandemic levels. This could have a cooling effect on house prices in the coming months.
  • Rising inflation, which the Bank of England expects to peak at 5% in April could further weigh on house spending. House prices have historically struggled to rise when real disposable income declines: But wages could of course catch up negating this effect.
  • Economists are warning of immediate mortgage rate rises. However, the flipside to this is the prospect or threat of higher mortgage rates, for now, is boosting housing demand ahead of this happening. The rush to beat rate rises is fueling an unusually busy market.

Concluding Remarks:

Movement in house prices affects us all: Property is an asset it is also a place for shelter, and we all need a roof over our heads.

The recent strength in prices has been bolstered by tax breaks, low supply, and continued demand, but clear headwinds to house prices rising at the recent high levels lie ahead. These headwinds may only curb the rate of growth rather than kill it entirely.

It is very difficult to predict the direction and magnitude of house prices moving forward. The key factors will be supply and demand, something we will watch keenly at True Potential.

< Back to Blog