UK housing prices are currently at its highest level. This has prompted optimism from current homeowners and provided further ammunition for those that believe prices will continue to increase in the future. But this has also caused some valid anxieties for first-time buyers, and individuals concerned that we are yet again in a housing bubble. So, where do prices go from here, and how should that affect my purchasing decision if I am a new or experienced buyer?
Zoopla reported that UK average house prices jumped up 4.3% year over year, with average house prices now hitting a record £233,700. This trend is felt more particularly in the Northern regions where houses are more affordable.
Why are house prices at current record levels?
There are two key reasons why prices are at their current records: (1) the gap between housing supply and demand (2) governmental policy to keep rates low and to encourage first-time buyers.
Market analysts argue that the surge in recent housing prices come primarily from a dislocation between housing demand and supply. The demand has increased dramatically since last July given the UK government’s stamp duty holiday, where buyers would not have to pay stamp duty on the first £500k of their purchase price (as opposed to £250k previously). According to data from the Buy Association, sale exchanges have increased by 55% year over year.
And UK housing is in undersupply. The UK parliament earlier this year issued a paper stating that England would need 345,000 new homes created each year. This compares with only 244,000 new homes in 2019-2020. To make matters worse, in 2021, the number of UK real estate listings, that is the supply, have dropped by 50% compared to usual levels.
But a less often talked about subject is how the current UK monetary policy and low interest rate environment is encouraging an increase in home-buying behavior. With more capital being available, mortgage lenders have more capital they want to deploy. And with rates being low, investors are more willing to take advantage of cheaper borrowing costs. For instance, the average mortgage term a decade ago used to be around 25 years. Now, 30-35 year mortgages are increasingly the norm.
And this phenomenon is not without governmental support. Rishi Sunak, in April 2021, announced a government-backed mortgage scheme to help people purchase a property with a 5% deposit. The aim of the scheme is to offer an easier pathway for first time home buyers to get on the property ladder.
So are we in a bubble, or is this the "new normal"?
Then to the larger question: so if I’m thinking of buying a property, should I buy now? Are prices then more likely to fall in the future, or are heightened home prices likely to continue? Market analysts believe that heightened home prices are likely to continue, with some arguing this could be a “new normal.”
As Vicky Spratt at iNews notes, the current housing price inflation is a deliberate by-product of the government’s strategy to help more buyers into the market, particularly first time buyers. Further, the government is also aware that a pricing crash would have large knock-on effects on the economy as a large percentage of people’s wealth is tied to their house value.
What about the gap between housing demand and supply? Has the forward view changed that supply will finally match with demand? Although the UK parliament notes that there is an agreement that the UK is in great undersupply, there is currently no consensus on how best to close the gap.
To argue the other side, heightened housing prices might also spur more developers to construct new properties in the future. But simply creating new homes without it being affordable for first-time buyers might also not solve the issue.
For investors looking to enter into the buy-to-let property market, make sure to develop a view on where the gap between housing supply and demand will be, and what your forward views are on the government continuing to create a supportive environment for home-buying. Those two key variables might help clarify if buying your new or next property is the right for you.
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