Throughout August, the UK housing market defied gravity yet again, with unofficial measures putting average prices at record highs. This is at odds with the wider economic turmoil, with the UK still in the early stages of rebuilding from the most severe contraction in economic activity on record. What is behind this apparent contradiction?
One factor is, of course, July’s stamp duty cut. We at Cebr estimate that July’s stamp duty cut will bring about a 1.2% increase in average prices and a 6.0% rise in the number of transactions compared with what otherwise might have happened. The temporary nature of the tax reduction means that the policy’s short term effects could be even more dramatic, as people rush to complete transactions before the return to the previous stamp duty regime at the end of March 2021.
Pent-up demand during lockdown is another important factor. Between March and June, there were a total of 246,000 housing transactions in the UK. If transaction numbers had remained at pre-crisis levels during this period (taken as the average monthly number of housing transactions between September 2019 and February 2020), the figure would have been 394,000. This implies that nearly 150,000 house purchases that would otherwise have taken place were put on hold between March and June as a result of the coronavirus pandemic. This shows the amount of pent-up demand built up during the lockdown. While this will to some extent have been matched by pent-up supply, data from RICS suggests that buyers have returned to the market more quickly than sellers, boosting prices.
Since early on in the pandemic, government guidelines and regulations have drastically curtailed repossession actions – both by landlords and mortgage lenders. According to the Ministry of Justice, there were just 161 mortgage repossession claims issued in Q2. During a typical quarter, mortgage repossession claims are issued on around 6,000 properties, with the number of properties taken into possession averaging around 2,000 per quarter. The suspension of forced sales and repossessions will have had some supply side impacts on the overall housing market throughout the second and third quarters, boosting prices as well.
In addition there is a data issue. Unofficial housing market data tends to be supplied by mortgage providers based on their transactions. We think it likely that the structure of the housing market has shifted because of the differential impact of the lockdown on incomes. It appears from the average earnings data that low income workers – particularly in the gig economy – have had their incomes much more badly affected by the coronavirus crisis than many of the more comfortably off, at least so far. As a result of this, housing activity in the summer months is likely to have been skewed towards higher value properties distorting some of the unofficial data.
Finally, there is the effect of the Coronavirus Job Retention Scheme, which has been instrumental in supporting incomes and therefore demand during the crisis. In mid August 9.6 million people were furloughed under the scheme, equating to nearly a third of the total number of people in employment in the UK.
What most of these factors have in common is that they are transitory in nature. Indeed, the Coronavirus Job Retention Scheme was cut after August and it, as well as the ban on mortgage possessions, is scheduled to end on 31st October, while stamp duty will revert to its original level in April 2021. Moreover, pent-up demand from the period of lockdown will eventually work its way out of the system in the coming weeks.
Our analysis suggests that prices will start to fall significantly towards the end of the year and the first half of 2021 (though there might be a short spike as the stamp duty reduction comes to an end), with average house prices forecast to be 13.8% lower in 2021 than in 2020.
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