In recent months, the UK property markets have been surging. We put up a post early in June titled UK House Prices Hit Record High But Likely To Keep Going that more or less summed up the state of things. From May of 2020 through to the time that article was posted, Halifax showed that the average selling price for a home had risen some £22,000 — a 9.5% annual increase.
Nationwide, in similar reporting, pegged the number at 10.9% (which marked the fastest rate of growth since August of 2014). And this past May alone prices rose by 1.3%, fuelling the notion that the trend might be poised to continue for a while yet.
In ordinary times, modestly rising home prices can come with some positive implications. They indicate some level of consumer confidence, and they benefit homeowners who have built up equity in property and are able to profit meaningfully off of sales or rentals. To say that a healthy housing market equals a healthy economy is a little too simple, but the correlation can certainly be accurate.
When prices rise this rapidly and drastically however, and for this long, the situation also causes concerns. In this specific instance, there are now widespread concerns that the UK is in the midst of a housing bubble that will inevitably burst to the detriment of the broader economy (and countless individuals’ financial wellbeing).
Furthermore, as was noted in an analysis by The Guardian, the pricing situation is virtually certain to worsen inequality, possibly in a lasting way.
Whether or not current trends in housing prices will continue is difficult to say with any degree of certainty. But as we continue to monitor the UK property market and its potential effects on the economy as a whole, there are some key indicators and important factors to keep an eye on.
The COVID Situation
COVID may be a factor unique to our times, but it is without a doubt the most important factor at this stage.
Last year, FXCM took an in-depth look at what a “second wave” of COVID would look like for the economy, and essentially forecasted volatility and upheaval. And while we don’t hear the phrase “second wave” as much as we used to in light of widespread vaccinations and fewer coronavirus cases, there are lingering concerns.
COVID variants are beginning to cause real problems even in parts of the world that were quick to vaccinate; it may be that effective vaccines will still require boosters; and vaccine hesitancy remains a problem in some areas as well.
If it does come to pass that any combination of these issues causes a resurgence of COVID-19, it would almost certainly be a negative indicator for the UK property market. There simply isn’t a lot of property investment or home buying during lockdowns or public health crises.
The Tax Rate
The previously mentioned piece at The Guardian clarified that the stamp duty tax has played a key role in the price spike in the property market. Chancellor Rishi Sunak cut this tax rate last year, and in March extended the so-called holiday through the end of June — a move which correlates closely with the reversal in housing price trends.
As things stand now, however, the June expiration date has held. According to the Financial Times, the stimulus will now be wound down over the course of a few months, with the tax break set to expire completely by 1st October. The same write-up indicates that analysts have mixed views regarding what immediate effect this will have. But the shifting stamp duty tax rate is certainly a key factor.
If nothing else, the end of the tax holiday should slow the rate of home purchasing. It has become clear that one reason for the rapid rate of transactions in this space can be attributed at least in part to buyers’ desire to make their purchases before the expiration of the cuts.
While there is no expectation as of this writing of shifting interest rates, this is still another indicator to watch. Near the outset of the pandemic, the Bank of England implemented emergency cuts to the interest rate as a means of preserving some degree of economic strength during the crisis.
This resulted in ultra-low rates (0.1%), which are increasingly being blamed for hints of inflation, including in the property market.
Again, there is no present expectation of a change on this front, and the current rate was upheld unanimously in June. Per The Times though, there will be another update on 5th August. If the rates are raised at that point, it would likely lead to a reaction in the UK property market (which is to say prices would almost certainly drop).
Lastly, it’s wise to keep an eye on the UK property market turnaround as well. To date, the spike in housing prices has been sustained in part by the fact that there are enough buyers who can afford the investment.
It is possible however that if prices continue to soar, more of the market will be priced out, and property turnaround will slow.
Incidentally, this speaks to some of the concerns we mentioned earlier about the current housing situation worsening economic and lifestyle inequality. There may simply come a point at which a large portion of the population is essentially priced out of property acquisition.
In a strictly economic sense though, slowing turnaround could also mark the beginning of a reversal of the market (even if it wouldn’t constitute a full crash or a “burst housing bubble”).
Under the current strange circumstances, emerging from a pandemic and a year of inactivity, the UK property market is one more aspect of the economy that feels somewhat unpredictable. By keeping an eye on these indicators this summer however, you’ll have a better idea of how things are moving in the UK property market.
To some extent, this may just help you measure broader economic recovery as well.
This article was brought to you by John Clacy. John Clacy is a finance blogger with a passion for following the latest trends. His goal is to share these trends with his readers and help them with their future. In his free time, he enjoys playing online chess.
Millie is a perfectionist with a passion for property and writing articles. You’ll find her researching the latest housing trends and the newest up and coming areas worth investing in. Read more about Millie here.