Since lockdown 1.0 ended, there has been a surge in house purchase activity, the like of which we haven’t seen since 2007. House prices are up, up and away! So is this just a reaction to pent up demand? Will this trend continue? What impact have mortgages had on this? We look at all these themes in this week’s blog:

Why are house prices going up so fast now?

This really is the million dollar question, and literally the million pound question for many in London and the South East. Yes, there is a small element of pent up demand from the housing market being locked down for 3 months, but the roots of this burst of activity run deeper.

Firstly, and most notably, you have the impact of the EU referendum result. Since that day in 2016, house prices in the South East have stagnated and even dropped in prime Central London. The concerns were about jobs moving to other EU countries. Will London, especially, still be a global financial hub? Will so many people still want to live in the UK? These were all un-answered questions (and frighteningly, just a matter of days away from leaving the EU, many of those questions remain unanswered…). So the housing market stalled until things were clearer. But they have never been clarified, hence the years of a stagnation in the housing market.

As we saw in 2010, there comes a time when after any economic shock or uncertainty ‘life moves on’. So no matter what the market conditions, after a period of time people simply need to move. People move in together, break up, have kids, upsize, downsize, want to near schools, want to move away from schools! You get the idea. So after really quite poor market conditions from 2008 onwards, we were finally starting to see a more ‘normal’ market at the start of 2020 which had house prices being pushed up as demand increased. Mortgages were much easier to get and the job market quite stable. All fertile ground for the housing market to flourish on.

What impact has the Stamp Duty holiday had?

As alluded to above, the start of 2020 was busy and many in the property game were looking forward to their best year since 2007. Then Covid hit… I can understand why the Government introduced the Stamp Duty holiday as they wanted to stimulate activity, but in the context of the above, all they really did was throw petrol on a fire. So my view is that it has simply overstimulated the market and hence why we are seeing monstrous gains in house prices in recent months.

Large house price indexes from Halifax, Nationwide, the Bank of England and others, all have house prices in the South East, and even more so in London going up 1-2% PER MONTH. Which is pushing the annual rate of house price inflation between 6-8% depending on which index you look at. That figure is also set to climb up further as more people rush to take advantage of the Stamp Duty holiday ending in March, and older more stagnant months wash out of the last 2 months. Come March/April I will not be surprised to house prices going up by 10% or more.

Will this house price trend continue?

It’s very unlikely that house prices will carry on gaining at the rate they are after April. Some had predicted a fall back after March as just a few weeks ago, we had the prospect of the furlough scheme ending, the Stamp Duty holiday ending and no end in sight for Covid. Well, what a difference a week makes! With the impending roll out of a vaccine, it averts this cliff edge date and no doubt will see people revise their expectations of 2021 far more positively. There has even been talk of extending the Stamp Duty deadline as mortgage lenders are just so slow at present to get mortgage offers out and the legal process is also clogging up.

So while I doubt we’ll see the epic gains we’ll end on in 2020, in 2021, I can also see how they will hold out and may still move up modestly next year. Historically, house prices in London double every 10 years. That hadn’t happened in the last 10 years, mainly as a legacy of the credit crunch when mortgages were much harder to get. But with housing stock still severely down, and mortgage availability up, simply market dynamics means that when demand is up and supply is down, prices go up. It really is as simple as that.

Are mortgages a help or a hinderance to this?

Currently, and believe it or not, mortgages are acting a break on the market. Many lenders have pulled away from lending to people with less than a 25% deposit and the smaller the deposit, the more that lack of supply is felt.

There are now only 2 banks who offer a mortgage if you have a 5% deposit, above a purchase price of £350,000. Compare that to over 20 pre-Covid and it shows how much lenders have pulled back. The pricing of the products are nearly double as well, so even if you qualify, it’s expensive. (Comparatively speaking as the base rate was at 5.5% in 2000, so even a market leading rate was 6%+ and with a 5% deposit many products were over 8% and people happily paid it then! Now, you are looking at sub 4% for a 5% deposit mortgage).

So as I expect mortgage lending eases up next year when things like Brexit and the impact of Covid are clearer, this end of the market will ease up and boost purchase lending. So those that can’t quite buy now, or are saving up, may well find it easier to do so in 2021 onwards which will be a further boost to the market. Huge risk warning – if there is a no deal Brexit and the vaccine isn’t successfully deployed, all bets are then off for 2021!

What will the future look like?

Isn’t that the golden question. With so many short term unknowns, and they are huge unknowns, it is very hard to predict. So what will things look like in 2-5 years’ time?

Well, we hope, a lot better. If you focus on the market fundamentals – mortgages are the easiest they have been to get since 2008, there is still a chronic undersupply of homes and more households/demand needed every year. Those staple points suggest prices will keep moving up regardless and no doubt well over and above inflation.

If you are ever in doubt of this dynamic, just look at what your house was worth 40 years ago (or what type of property you want to buy is). Nationwide’s house price calculator is great for this. If you look at the average price of a home in 1980, and assume it was £100,000 then, what do you think that comes out at today? A staggering £989,274 or 889% inflation! So if that is a fair guide, a property worth £500,000 today could well be worth £4.445m by 2060… sounds crazy, but it’s true.

Whatever the next year or two looks like, property has and will be a good investment, but moreover, you simply need a home! And a mortgage free home when you retire offers you the greatest level of security. For us, that is the thing to focus on. When you own your own home outright, that is the biggest safeguard against whatever the future holds.

If you would like to talk to any of our advisers, they will be more than happy to answer any questions you may have and you can find them all here.

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