What the UK housing market could look like post-pandemic

Category: News

The UK housing market has seen strong growth during the pandemic, despite the double whammy effect of Brexit and the national lockdowns. According to the latest figures from the Office for National Statistics (ONS), UK average house prices have increased by 13.2% in the year to June 2021.

This has been a pleasant surprise to many homeowners, but also raises the question of what it will look like when the pandemic ends.

While the stars may have aligned for house price growth in recent months, it seems like the economic factors that drove the boom may be starting to change. Read on to find out what the housing market could look like post-pandemic.

The Stamp Duty holiday and national lockdowns encouraged many prospective buyers

During the pandemic, the UK housing market underwent an unexpected boom, with average house prices rising significantly due to a variety of factors working in tandem.

One of the biggest reasons for the increase in prices was the government’s implementation of the Stamp Duty holiday. During this period, buyers could save up to £15,000 in tax when moving home.

In the early months of the pandemic, the national lockdowns had a negative impact on the housing market, as restrictions made it difficult for surveyors and prospective buyers to visit properties.

This caused a minor slump in property prices, and so as a preventative measure the chancellor announced the Stamp Duty holiday to reinvigorate the market. This move encouraged prospective buyers to move home quickly, in order to save money on tax.

Another factor that encouraged buyers was the government’s implementation of the national lockdowns. With a large portion of the public working remotely, many people reassessed what they wanted from a home.

For example, according to estate agents Savills, the percentage of people who stated that the size of a garden or outside space was important when buying a home rose by 13% from its pre-pandemic level.

A third underlying factor has been that interest rates fell to a historic low of 0.1% during the pandemic. This has allowed buyers to borrow large amounts of money more cheaply, enabling sellers to demand more for their homes.

However, while these three factors have encouraged a housing “mini-boom”, they may be about to change.

The Stamp Duty holiday will end on 1 October, removing an incentive for buyers

While the Stamp Duty holiday has provided encouragement for many buyers, it is now drawing to a close.

To avoid a “cliff-edge” scenario, the government decided to taper the end of the holiday, instead of bringing it to a close on an arbitrary date. From 1 October, the nil-rate band will return to the standard amount of £125,000 (it’s higher if you are a first-time buyer).

Given that the holiday provided a strong incentive for many prospective buyers who were on the fence, it seems likely that when it ends, there may be a fall in demand.

Rising inflation may prompt an increase in interest rates, punishing mortgage holders

Another economic factor that could affect the housing market is inflation, which has spiked in recent months as the economy reopens. According to figures from the ONS, the Consumer Price Index including owner occupiers’ housing costs (CPIH) rose by 2.1% in the year to July 2021.

While a small amount of inflation is typically good for the economy, which is why the Bank of England has an inflation target of 2%, too much can be a bad thing. To counter this issue, they may need to raise interest rates to counter it.

While this move would be good news for savers, high interest rates could penalise mortgage holders, as their monthly repayments could quickly become much higher. If people are unable to keep up with their monthly payments, they may fall into arrears or, at worst, their homes may be repossessed.

Typically, when this happens, the banks try to sell the house on as quickly as possible and to do this, they often do so for less than it is worth. If the number of repossessions were to rise, it could create a glut of cheaper properties on the market, which may drive down house prices.

Another implication of higher interest rates is that many prospective buyers may not be able to secure a mortgage. If the cost of a mortgage rises, some buyers will not be able to meet their lender’s affordability criteria. This could reduce demand, as there are less buyers vying for available houses.

Lack of supply means that house prices are likely to remain high in the short term

While the housing market has enjoyed strong growth in recent months, it may start to cool off as we start to come out of the pandemic.

As the Stamp Duty holiday comes to an end, it seems likely that there will be a fall in the amount of demand from prospective buyers. Furthermore, if the Bank of England does choose to raise interest rates, it could produce a further drop in demand, as well as increase the supply of homes, pushing house prices down further.

On top of this, there is also the issue that, while the strong housing market growth has been beneficial for homeowners, it may also be pricing first-time buyers out of the market.

According to a report by Nationwide, published in the Times, a 10% mortgage deposit is now more than half of a typical first-time buyer’s income. This can pose problems, as it can be hard for homeowners to upsize if there is nobody to buy their current house from them.

Despite these potential issues, there is also plenty of hope for the market, at least in the near future. One of the main reasons for this is that is that there is currently greater demand for homes than there is a supply of them.

Mark Hayward, of the estate agents Propertymark, was quoted in Which? as saying that “The market is experiencing a growing imbalance of supply and demand, and we see no indication that supply levels will increase.” Due to this, he firmly believes that the UK is still a “strong seller’s market”.

While it’s difficult to predict what the future may hold for the housing market, if you’re thinking of taking your first step onto the property ladder, you may benefit from seeking professional advice. Working with a mortgage consultant can help to make the process of buying a home faster and less stressful, helping to give you more peace of mind.

Get in touch

If you’re wanting to buy a home in the near future and want to know more about how working with a professional can help you, get in touch. Email us at office@verve-financial.com or call 0330 320 5048.

Please note:

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

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