Is this a house price bubble?

At the start of 2020, many commentators predicted flat or slightly declining house prices over the year as we waited to see what kind of Brexit trade deal the government struck with the EU. When the pandemic struck and we entered lockdown, the consensus was that prices would fall. Yet as soon as the market opened up in July, when viewings and transactions were permitted again, prices started to rise and in some areas it seems they have risen quite strongly.

One factor is obviously pent-up demand from people who wanted to buy or sell but could do nothing during lockdown. Another is the Stamp Duty holiday announced the Chancellor in July: no Stamp Duty is payable on any purchase of a home for under £500,000, which represents a £15,000 saving at the £500,000 upper threshold.

Unfortunately, the people in most need of help - first time buyers (FTBs) - benefit least, because no stamp duty was paid on purchases under £125,000 in any case. So FTB savings are quite modest - no more than £2,000. But they have also been hit by a tightening of credit conditions. Banks have withdrawn 95% Loan-To-Value mortgages and made their 90% LTV mortgages more expensive, or require a larger deposit, or both. A sharp rise in the proportion of purchases being made for cash shows it is people with one or more properties already who are benefiting from the tax holiday.

Already many leading agents are worrying that prices will drop sharply when the Stamp Duty holiday ends next March, and they and the housebuilders are lobbying the Chancellor hard for an extension of the tax break.

Historically, periods of sharply rising unemployment have often been followed by declining house prices, and a considerable degree of optimism seems to be required to bet against this happening in 2021.

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