In some forecasting circles, house prices are predicted to rise by as much as 5% over 2020.
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Rightmove reported in its latest HPI release on Monday that the U.K. had witnessed record-breaking house price growth in January, coming in at 2.3% – the largest ever recorded during this period. Coming off the back of the recent RICS Survey, it’s unsurprising that market sentiment, buyer interest and house price increases are all on the rise. In some forecasting circles, house prices are predicted to rise by as much as 5% over 2020.
I wrote just after the election that, although house prices historically did not increase much following an election, we’re in unusual times, and that renewed confidence could lead to a short-term surge in house prices.
The results are certainly painting the picture, but some are already wondering: is it sustainable beyond the release of pent-up demand? It begs some investigation into the causes behind this price surge to discover what we might expect to see in the long term.
Cause And Effect
A scarcity in available housing stock predominantly supports rising house prices. According to the latest Home Asking Price Index, there has been a 9.7% decline in sales housing stock across England and Wales for the 12 months up until December 2019.
This past month we’re seeing both renewed demand and market interest. The Rightmove HPI notes that since the election 1.3 million buyer enquires have been made, up 15% on the same period a year ago. Factoring in the 7.4% growth in sales agreed on these early-bird sales, it does suggest a bright short-term outlook. The latest property transaction statistics from HMRC registered (on estimation) 104,670 property transaction over December 2019, a 6.8% increase on December 2018.
And, although a precipitous drop, it pales against London’s own 23% decline in housing stock over the same period. Perhaps unsurprisingly the capital has seen prices rise by 2.1% in January, with a substantial leap of 19% in sales agreed of the same period last year – clearly increasing prices aren’t putting everyone off – pent-up demand has to go somewhere.
What Does It Mean For The Market?
As mentioned above, demand and short supply are the two main factors fuelling house prices, but if post-election confidence maintains, encouraging more sellers to put their properties to market, the corresponding increase in stock may balance demand, but perhaps might not bring down house prices.
However, there are still a number of factors that could spin house prices and the extended market in either direction. Stop me if you’ve heard these before:
Stamp duty remains a prohibitive cost for many towards their next home. The next Budget could include an announcement of stamp duty adjustments – I’d expect raising the minimum threshold to £500,000 and/or lowering rates to ease the burden on buyers, with a corresponding increase in transactions as a result. Adjusting stamp duty might not bring house prices down but it would make it easier for buyers to leverage the cash.
Brexit is still hanging around and, while not imminently an issue with this majority government, has the potential to cause confidence to retreat later in the year as we near the end of the December 31, 2020 transition period. Political and economic uncertainty undermines consumer confidence, and we’ve seen this negative impact on the housing market over the past few years.
Construction of new builds is also a means of introducing more supply, which should dampen house prices and make them more affordable. The Conservative’s have promised to build at least a million new homes before the end of the current Parliament, and though I’m sceptical about them achieving that considering past precedent, an increase in available stock could help to cap prices by injecting more affordable housing into the market.
It’s worth taking a closer look at this final point on construction, as it’s been some time since any large-scale homebuilding project has been successfully undertaken in the U.K.
Build-To-Rent
One of the issues with residential construction today is that firms are sitting on viable development land, reducing market stock and funnelling supply, and with more people renting than ever before, there’s a need for residential homes that are either affordable to buy or let out at reasonable rates. Both are factors determined on more homes available on the market.
With the new government planning to encourage construction investment using private funds rather than public, there may be significant interest from the build-to-rent sector to get involved. Property management companies like Urbanbubble – which has shown remarkable growth over the last year despite market uncertainty – demonstrate that productive relationships can be built with developers and investors to encourage construction offering value to the lettings industry.
Final thoughts
For the short term at least, consumers are happy to have a little more certainty injected into their daily lives, and there’s a lot of pent up demand and capital just itching to be released into the housing market.
Whilst it’s possible that the current surge in house price growth will abate in the months ahead, I’m cautiously optimistic that if market conditions maintain and incoming policy within the next Budget on March 11 is favourable, then healthy growth in the housing market can resume, with affordable housing to boot.