What drove the house price surge?

Ned Browne

In 2020, on average, UK house prices climbed 8.5%—a figure that, at the start of the pandemic, would have surprised most observers. But, in reality, it wasn’t market forces that drove this surge in house prices, it was political action.

The stamp duty holiday

stamp duty house

Early in June 2020, the Chancellor, Rishi Sunak, announced the first stamp duty holiday. This eliminated stamp duty for all property purchases up to £500,000. That meant that, from 8th July 2020, many properties were effectively discounted.

For example, a home mover (ie not a first-time buyer) buying a property for £495,000 would save £14,750 in stamp duty under this scheme.

The stamp duty holiday, which only applies to England and Northern Ireland, was meant to end on the 31st March, but it has now been extended until the end of June.

 

Caveat emptor

Those within the property sector, including homebuilders, estate agents and buyers, have welcomed this initiative. But the conveyancing industry is struggling. Many in the industry have complained that certain local authority searches are taking far longer than normal, some in excess of six weeks. (Local authority searches are required by lenders and contain specific information about the property and the surrounding area.)

So, if you’re starting your property search now, you need to get your skates on—conveyancing, on a very good day, takes at least six weeks. And this is not a good day.

 

Interest rates

english block of flats

Another significant factor affecting property prices is interest rates. I have written about these extensively in the past, but it’s worth reiterating that interest rates are still at historic lows. This means that, for many, being a homeowner has never been cheaper.

Low interest rates and other government support, such as the furlough scheme, seem to have prevented a wave of repossessions. Nonetheless, we’re not out of the woods: a study recently undertaken by The Social Market Foundation suggested that nearly 800,000 homeowners were “vulnerable” to repossession. Let’s hope this doesn’t come to pass.

 

5% deposits

In the budget, the government also announced a plan to guarantee mortgages for buyers with smaller deposits, allowing people to borrow up to 95% of the value of the property. This scheme will operate in every country in the UK, but will have an upper limit: only homes costing £600,000 or less will be eligible.  

The scheme is set to start in April and will run until the end of 2022. HSBC, Santander, Lloyds, Barclays and Natwest are all planning to offer such loans from next month.

 

So, what does this all mean?

block of flats

Rapidly rising property prices have created significant social inequality and social divide—both examples of market failure. And it’s the younger generation who have suffered.

But successive governments seem to have boxed themselves into a corner: as they try to rectify market failure by intervening in the market, they only seem to make things worse. For example, the various “help to buy” schemes did get more people onto the property ladder, but they also stoked demand for properties, pushing prices still higher. The current interventions have and will do the same.

Is now the time for a complete rethink?

 

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