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September 2021 | Market

Resilience should see out the year

Steve Goodall is managing director of e.surv

What a year for the UK’s housing market so far. The latest data published by the Office for National Statistics (ONS) showed UK house prices rose 13.2% on average over the year to June 2021, up from 9.8% in May 2021 – the highest annual growth rate the UK has seen since November 2004. This means the UK average house price reached a record high of £266,000 in June 2021, some £31,000 higher than this time last year.

Meanwhile, Bank of England statistics confirmed that net mortgage borrowing reached a record high of £17.9bn in June, just before the lower stamp duty rates began to taper off from July. Mortgage approvals for house purchase were 81,300 in June, down from 86,900 in April.

These figures are at the same time both entirely to be expected and completely extraordinary. They reflect a market that has been high on tax cuts for a year.

Heading into the autumn, we will be weaning ourselves off the stamp duty crack, and the question we must surely all be asking ourselves is this: what impact will this have on activity levels, asset values and pricing?

First things first, I suspect we won’t see an immediate drop off in transaction volumes, largely due to the overhang that will inevitably follow the race to complete before the end of the stamp duty holiday on 30 September.

The pandemic and more than a year of successive lockdowns have also changed many people’s living priorities. Outside space, home working and more time spent at home mean that huge numbers of people want to move, regardless of the stamp duty bonus on offer at the moment.

Towards the year’s end, activity is likely to cool as stamp duty-driven transactions complete.

Nevertheless, Q4 is always a strong one, as lenders compete through pricing to hit their targets, and I suspect this year will be no different. We are already seeing incredibly fierce competition on pricing, with rates falling below 0.9% for the first time ever. The question now is where they will go next.

The Bank of England has held the base rate at 0.1% so far, even with inflation rising rapidly. UK consumer price index inflation data revealed a rise of 2.0% in the 12 months to July, compared to 2.5% in June. While this was lower than expected, the Bank of England has suggested it will hit 4% by year’s end, double the Monetary Policy Committee’s 2% target.

Inflation really is the elephant in the room at the moment – second-hand car prices are going up, indicating that something is very awry in the economy. We know what that is: the impact of government’s unprecedented pandemic spending measures, alongside the Bank of England printing money like there’s no tomorrow.

Unfortunately tomorrow is looming ever closer, and the tools the Bank of England has in its arsenal are limited. If inflation runs amok for too sustained a period, central bankers will have little choice but to start raising the base rate reasonably quickly.

When that happens, there will be market disruption and an increase in considerably more expensive mortgage rates is likely to dampen demand, knocking a portion of borrowers out of the running, due to lower affordability. The bank is acutely aware of this; not only would a rate hike put the brakes on new borrowing, it would also seriously compromise a huge number of existing borrowers on variable rates unable to remortgage.

Managing mass repossessions, or asking the banks to cover payment shortfalls through forbearance – perhaps permanently – doesn’t look appealing either.

The very buoyant jobs market and rising wage inflation are good for economic recovery, and it’s unlikely that the Bank of England will be desperate to dent companies’ investment in that any time soon.

House price inflation, meanwhile, is more likely to drop back towards the end of the year. The rush to take advantage of the stamp duty holiday lit a fire under property values as buyers vied for their offers to be accepted.

Estate agents report that some of the heat has already come out of the market over the summer, and through August in particular, as everyone packed the family off for a last minute beach break.

September traditionally sees a bounce in new instructions, though, and that’s likely to repeat this year. 

In terms of the new-build market, I am mindful of reports in the papers indicating a serious lack of skilled builders, electricians, bricklayers and plumbers in the aftermath of Brexit and the pandemic double whammy.

Still to be negotiated trade agreements are putting serious pressure on supply chains, and the cost of materials has shot up. The price of steel, for example, has rocketed around 57% since the end of 2020. These factors make building new homes more expensive and will slow down construction rates, leaving a mark on supply which will, in turn, knock on to values more generally.

Beyond these observations, my crystal ball gazing skills fail me. It’s a mixed bag, but one I feel reasonably confident will have limited impact on the housing market’s resilience over the rest of the year.