Nationwide recently reported a second month of rapidly rising house prices, with a 0.9% increase for September following August’s 2% surge.
The year-on-year rate of growth has risen to 5%. This sets a new record for the average house price and confirms other reports of a very active housing market since it reopened in May.
Part of the reason it’s so busy is that the market is still playing catch-up after being delayed by Brexit uncertainty, a General Election and then lockdown.
Buyers and sellers are looking to push through sales they were forced to put on hold in the spring, which is typically the busiest season for the housing market.
But much of the demand is coming from new buyers who may have brought forward plans to buy in a bid to cash in on the stamp duty cut announced by the chancellor in July.
Until 31 March next year, around 90% of buyers will not have to pay any stamp duty at all due to the stamp duty holiday.
For the moment, no stamp duty has to be paid on homes up to the value of £500,000. (Note: stamp duty is still payable at 3% on second homes, such as holiday homes for buy-to-let investments)
The question remains, however, whether this demand will dry up once the holiday draws to a close early next year.
Learning from the past
It is inevitable that everyone across the property and mortgage industries will be working flat out in order to achieve completion by the cut-off date, and there are clear historical precedents to indicate what will happen.
We can look at previous stamp duty deadlines to get some indication. The last significant one was in March 2016, when stamp duty was increased by 3% for nearly all second home purchases.
There was a big spike in completions in that month, followed by a slowdown, as sales were brought forward to hit the deadline.
Based on the data from 2016, we might expect to see an additional 100,000 sales completed in Q1 (Quarter One of the year, which is the three months to March), mostly in March, which will put pressure on mortgage lenders, conveyancers, valuers, surveyors and estate agents.
HSBC recently became the latest in a long line of lenders to temporarily suspend 90% LTV deals for new borrowers due to high demand negatively impacting service levels. This issue will only worsen as we inch closer to the stamp duty holiday deadline and lenders and conveyancers find themselves struggling to meet demand.
As far as house-hunting activity goes, buyers should take this into account and look to give themselves at least a three-month window to reach completion.
As a result, the market should be very active right up to Christmas this year – and perhaps into January for optimists – and then slow right down in Q2 (April to June), when there will no doubt be a slump in transactions.
Less severe than the economic crisis
However, in many ways, this will be an artificially induced recession. While the elements of a recession are there (unemployment coupled with strong budget deficits), markets and financial institutions are structurally more prepared to weather the storm than they were during the economic crisis of 2008/09.
As such, we can optimistically expect transaction levels to steadily rise over the course of Q2 before returning to normal levels in Q3.
The housing market depends on mortgage lending to keep pumping new money into it, and that dried up after 2008 because it was a financial crisis that originated in the finance sector, specifically because of very lax mortgage lending practices.
That’s not what we’re seeing this time and, while the perception of a risk of falling house prices will certainly cause lenders to be more cautious (especially in the high loan-to-value sector), we don’t expect lending to dry up like it did in 2009 when it was only cash buyers keeping the market going.
Right now, there’s a lot of money floating around looking for any kind of return on investment, and property remains a comparably safe place to park that money and make a reasonable return.
Uncertainty remains
Though we essentially exited lockdown as a nation in July when most restrictions were eased, many firms are still not operating at full capacity, thousands are working from home, many are still furloughed, local lockdowns continue to be implemented, and there is talk of another national lockdown.
A new Covid-19 surge and a long second lockdown that closes the property market again would of course put a spanner in the works, as would serious economic disruption caused by the end of the Brexit transition on 1 January 2021.
Either of these would lead to an immediate and drastic slowdown in the market, and the chancellor may then consider extending the deadline.
Even if we do manage to avoid another lockdown, there are likely to be some headwinds over the next couple of months as the furlough scheme ends and unemployment rises, hampering the economy and the property market.
While the high levels of demand seem to indicate that potential buyers are not currently worried about their individual financial positions, a sharp rise in unemployment would normally lead to repossessions and forced sales, increasing the supply of homes and thus pushing down prices.
However, the government may encourage – or even require – forbearance from lenders in these circumstances, as it has already done (at least in the short-term) for renters.
Now is the time to sell
The anticipated short-term slowdown in market activity after the stamp duty holiday ends is unlikely to have an immediate impact on prices, but it may make it slower and more difficult to sell.
The Royal Institution of Chartered Surveyors has warned that, while the UK housing market could be experiencing a temporary boom, this is likely to be followed by a bust.
We can expect a rocky second quarter next year regardless, so if you’re thinking of selling you should act now to get your property on the market while it’s strong and active, both to ensure that you achieve the best possible price, and to allow enough time for your sale and any onward purchase to complete before the end of the stamp duty holiday in March 2021.
Mike Scott is chief property analyst at full-service estate agency Yopa
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