Is the revitalisation of the housing market sustainable or will the price bubble burst?

December 03, 2020

Is the revitalisation of the housing market sustainable or will the price bubble burst?

Despite turbulence to the economy this year, activity has risen in the past few months as house price increases, especially in London and Yorkshire & The Humber, indicate a thriving market. According to research accumulated by Nationwide, house prices rose by 0.9% in September in a fairly even spread with the previously mentioned areas increasing by as much as 3% in the third quarter of this year. This strong price growth has been driven by high levels of competition and market activity. In fact, 76% of Surveyors in a recent RICS survey report a vast increase in new buyer enquiries, with a further 69% reporting an increasing level of instructions.

The release of the OTS recommendation to double the rates of capital gains tax could bolster further activity in the property market in the short-term, especially seen as these changes are not likely to take effect until the second half of 2021. However, this is not favourable news in the longer-term as it will potentially affect the profitability for returns on second home investments and align these more closely with income tax rates. We may also see an increase in the stringency of loan to value ratios and this could inhibit the capacity for market growth.

More favourably, according to Hometrack the first quarter of 2021 is set to record a property uplift, with 100,000 additional sales expected to complete before the end of the stamp duty deadline. Market analysis continues to look positive as UK house price growth rises to +3.5%, the highest for almost 3 years. Though demand has dipped slightly to below pre-Covid levels, likely a reflection of the latest lockdown, it still remains 34% higher than last year.

Taking all of this into consideration, are we likely to see a correction to house prices in 2021?

This has been a contentious topic with many leading analysts dissenting on whether recent data is indicative of an imminent housing market crash. The fundamental factors which are considered in these predictions are: the rate of economic growth and subsequently interest rates; the availability and affordability of homes and any movement to wages or income rates. Needless to say, all of these factors have been directly impacted by the consequences of the pandemic and thus, the extent of the economic fallout largely depends on how long it will take for society to return to a form of normalcy. The increased interest rates stem from the Treasury and the Bank of England’s attempt to stimulate the economy with expenditure and it is likely that this method of quantitative easing will continue until the pace of economic growth strengthens. A continuation of low-interest rates is favourable to the housing market as it ensures mortgage funding remains relatively cheap and this in turn keeps house prices high. The vastly greater demand to supply situation in the UK will also be a preventative factor of a housing crash.  According to data collected from the ONS, for the UK to meet the demand, 300,00 new homes must be built each year and data from the past few years evidences a consistent and significant shortfall. Therefore, this is also a positive towards ensuring that house prices continue to accumulate capital and will not drop to an amount that would cause a market crash.

Although, all of the above will be directly affected by society’s ability to control and regulate the spread of Covid-19 and November 2020 has been a significantly dynamic month in this respect. The news of imminent distribution of an effective vaccination has already increased market sentiment, with many set to accumulate capital, as the end to the severe restrictions is within sight. The announcement of the extension of the furlough scheme until March 2021 is another round of welcome news as this may slow the rate of unemployment. The housing market has remained remarkably immune to the pitfalls caused by the pandemic, bolstered by the temporary stamp duty holiday and various income support schemes. The challenge is to manage the inevitable dip in the market when economic fallout from the pandemic catches up and the capability of the economy to facilitate this is where concern begins to set in. The longer the restrictions of the pandemic continue to slow economic growth, reduce income rates and create market valuation volatility the more likely it is that the housing market will suffer.

Moving forward as a company, Accumulate Capital continues to anticipate the most recent market trends and navigate these to ensure that we make the most of the resilience of the housing economy whilst it flourishes. Sentiment amongst our investors has seen a significant morale boost with the encouraging news announced towards the end of 2020. We are entering an investor’s market with low-interest rates set to continue into 2021 and optimism surrounding the likeliness of control of the virus to kickstart an economic recovery shortly after.


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