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House prices spike as property market reshapes

Updated 01 December 2022

5min read

Nick Green
Financial Journalist

The predicted house price crash has been averted – at least for now – by the stamp duty holiday. But many commentators predict the UK’s housing market will change significantly from here on. Article by Nick Green.

Property prices in mini-boom

The UK housing market has defied predictions of a crash and instead has entered a mini-boom. However, there are still question marks over how long this will last, and whether the slump has simply been postponed until later.

Several factors are behind the surge in property prices. The biggest is undoubtedly the rush to take advantage the stamp duty holiday which applies to all purchases that complete before 31 March 2021. Another is the backlog of home sales that were put on hold when the property market was frozen in the spring, which caused demand to shoot up by 88% when sales in England restarted.

The result has been that the already notorious UK housing market has been breaking records – again. Rightmove reports that prices are up by 2.4% since March, and coming onto the market at a record average asking price of £320,265. Buyer enquiries are also up by 75% and agreed sales are exceeding 2019 figures across all nations of the UK.

It's worth noting that both of these are temporary factors. The pent-up demand caused by the freeze will blow itself out, and the stamp duty holiday is on a timed fuse. The real possibility that this mini-boom will collapse in March is itself a key driver, since sellers are rushing to get the best prices they can. Indeed the biggest beneficiaries of the stamp duty holiday may be sellers, not buyers, since many are simply increasing their asking prices. This, however, may not be a wise move.

Rightmove’s director Miles Shipside warns, ‘In reality, sellers need to find a buyer before Christmas, to allow a further three months for completion of the legal process to beat the [stamp duty holiday] deadline. While property is selling much faster than a year ago, it’s important not to over-price and miss this window.’

90% mortgages make a comeback

Another factor (though one directly linked to the mini-boom) has been the return of 90% LTV mortgages to the market. The Nationwide Building Society has relaunched its 90% mortgages (though only for existing customers) after temporarily withdrawing them, and other lenders look poised to follow suit. These types of mortgages do remain harder to get, however, and offer less generous interest rates, so first-time buyers should seek advice from a mortgage broker and follow these mortgage tips too.

Nationwide to limit deposits from 'the Bank of Mum and Dad'

Nationwide building society has sprung a nasty surprise on first-time buyers, with an extraordinary new restriction on how much money they can take from their parents to fund the deposit on their home. Nationwide is now insisting that buyers save at least 75% of their mortgage deposit themselves, and provide proof that they have done this. Apparently, the new requirement is to provide greater assurance that buyers really can afford their mortgage repayments.

The move will come as a blow for thousands of first-time buyers, many of whom will comfortably be able to meet their mortgage repayments (and have proved this by paying rent), but have been unable to save up tens of thousands of pounds due to the high cost of their rent. For this reason it is a somewhat confusing decision by Nationwide, and a cause for some concern. It suggests that the building society wants first-time buyers to have a very large safety margin indeed between their monthly repayments and what they can actually afford. This in turn implies that Nationwide expects either a big drop in house prices, a rise in interest rates, or possibly both. The decision may also be anticipating widespread job losses as a possible consequence of COVID-19.

First-time buyers will also need at least a 15% deposit. With the average first home costing £220,000 this means a deposit of £33,000 - of which first-time buyers would have to find £24,750. This may greatly restrict the number of new buyers entering the market in the months ahead.

Mini-boom may be masking ‘true’ house prices

Data from before the COVID crisis suggests the UK was not naturally heading for a housing boom. House price growth since 2016 had been on a downward slide, so that although prices were increasing, they were increasing at an ever slower rate. In June 2019 this rate was less than 1% and trended lower until the New Year. The implication is therefore that properties are being over-valued due to the artificial pressure of the stamp duty break and the property freeze ending.

Many are expecting house prices to drop again before March, perhaps to ‘normal’ (whatever that is) and perhaps into a slump. But additional, more subtle factors may be helping to buoy prices up.

Changing priorities are affecting the housing market

Some estate agents have observed new drivers of the property market have emerged due to the crisis. One unfortunate side-effect has been an increase in relationship break-ups and divorces, as lockdown gives some couples ‘cabin fever’. According to Co-op Legal Services, divorce enquiries have soared by 40% since lockdown began, and every split means that at least one partner needs someone new to live – either to buy or to rent.

Birmingham estate agent James Forrester says, ‘We are seeing a spike without a shadow of a doubt. It’s just unfortunate we’re seeing the boost from people deciding they no longer want to be together.’ Jonathan Hopper, CEO of Garrington Property Finders, agrees. ‘It’s a real thing in the market and it is driving supply. Some people have re-evaluated what they want from life, and I think [lockdown] has been the catalyst.’

Jeremy Leaf, a North London estate agent, has noticed a particular uptick in the rentals market. He says, ‘It’s easier to flip in and out of a property.’ And although landlords will still have to pay their additional rate of stamp duty, they too can benefit from the suspension of ordinary stamp duty.

An even more important long-term driver maybe the shifting of homebuyer priorities. The COVID lockdown has forced everyone (whether they currently own a home or not) to reassess where and how they want to live. London, which based on property prices has for decades been the most desirable place to live in the UK, has lost some of its appeal. Small flats or terraces with minimal or zero outside space are not the best places to spend a lockdown, and although everyone hopes coronavirus is a rare ‘Black Swan’ event, it has made millions see their homes in a new light. It’s reminded people that a home is not just an investment – it is where you’ll live.

How the housing market could reshape

It is possible that these pressures could end up changing the face of the property market. The London-centric price peak is likely to flatten considerably now that Londoners have discovered the joys of home-working and begun to envy those with gardens. Commuter belts are likely to become the main recipients of the pricing shift, but rural areas could also pick up now that Britain’s remote working taboo has been broken.

If March does bring a slump in house prices, this won’t be a disappointment for everyone. Would-be first-time buyers who have managed to save more during the lockdown will welcoming any increase in affordability. And since first-time buyers don’t pay stamp duty anyway on the first £300,000 of a property, the end of the stamp duty holiday might be the window of opportunity they are looking for.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.