Increase in supply and interest rates will tame UK house price growth
New analysis shows which areas have seen the biggest rise in the value of their housing stock over the course of the pandemic.
3 minutes to read
UK house price growth is holding up surprisingly well given the stamp duty holiday ended just as inflationary pressures began to multiply and the furlough scheme finished.
Last week, the Nationwide reported that UK prices rose 9.9% in the year to October, a figure that was effectively unchanged from September, the final month of the stamp duty holiday.
So, why is the housing market apparently defying economic gravity?
Demand is stronger than normal, bolstered by frustrated buyers who were unable to move during the stamp duty holiday and those who waited for calmer conditions after its conclusion.
Meanwhile, supply has been kept in check for reasons explored in more detail here.
Nationwide also reported that the average UK price exceeded £250,000 in October for the first time.
Indeed, new analysis shows the total value of the housing stock in England and Wales was £7.68 trillion in July 2021, which was an uplift of £720 billion from March 2020, when the total value was £6.96 trillion.
The study, which puts a number on the total value of all private housing, factors in exchange prices as well as changes to house prices. A higher overall figure can reflect a larger number of households in a given local authority as well as higher-value properties.
The combined housing stock in the top ten local authorities by value also broke through the trillion-pound barrier over the course of the pandemic, rising to £1.007 trillion from £978 billion.
However, there were not increases everywhere.
The highest total in July this year was £157.8 billion in the central London borough of Westminster, which was down by 10.1% from March 2020. The decline was the highest in England and Wales but is understandable given the area’s high proportion of flats and the fact fewer international buyers were able to travel to the UK.
However, it was one of only three local authorities in England and Wales that saw the value of its housing stock fall over the period, together with Lambeth (-2.2%) and Wandsworth (-1.1%).
There were other interesting changes in the top ten most valuable areas over the course of the pandemic. Cornwall leapfrogged Richmond-Upon-Thames into eighth place while Leeds replaced Ealing at number ten. Both changes can be explained by the growing demand for space and we have previously explored how Yorkshire, in particular, has benefitted from this trend.
The top three largest increases over the period were all in north-west England: Rossendale (24.2%), Wirral (21.6%) and Liverpool (21.6%).
Two things will curtail this strong level of growth.
The first is rising interest rates. Last week, the Bank of England held the base rate at 0.1% but a rise is clearly coming.
However, it would be wrong to overstate the short-term impact on the UK housing market. Rates were 0.75% before Covid struck and any effect is likely to be limited while rates remain below this level. What’s different between now and early 2020 is the presence of inflationary pressures, which may cause demand to start fraying around the edges depending on how elastic the definition of “transitory” becomes.
Longer term, there will need to be a readjustment as rates normalise, a process that has been delayed by the pandemic.
Over 3.5 million first-time buyer mortgages have been issued since the base rate dropped to 0.5% in March 2009. That is a large group of homeowners who don’t know what it’s like when interest payments rise meaningfully.
The other thing to watch closely is supply, which will put downwards pressure on prices as it increases.
The housing market is famously seasonal, so can we tell yet what is likely to happen next spring?
James Cleland, head of Knight Frank’s Country business, says owners are already positioning themselves for 2022.
“We are starting to see a notable increase in the number of owners contacting us with a view to listing their property next spring. For shrewd sellers, the best time to put their property on the market is likely to actually be January when there are a large number of buyers around.”
It’s a reasonable assumption, therefore, that fewer parts of the country will be experiencing double-digit house price growth this time next year.