Will the property pandemic bubble burst?

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Demand for property has pushed average house prices up 10.9% over the past year, the fastest pace for almost seven years.

Is this growth sustainable? Almost certainly not but that is not to say prices will come tumbling down.

What could happen?

Some are expecting a market correction or even a crash. Indeed, the end of the stamp duty holiday – currently set to taper down from July 1 before the tax returns to normal levels from October 1 – has been earmarked as a potential trigger for this event, just as its introduction helped to spark the current boom in the first place.

It seems likely that the steady return to the stamp duty status quo will go some way to stabilising the market. It will almost certainly dampen the huge levels of demand currently experienced from buyers, sellers and investors, although perhaps not to such an extent that prices enter into a downward spiral.

After all, it would be foolish to pretend that the current buoyancy of the UK property market is purely the result of the tax savings on offer. That has helped to unlock the near-constant demand that exists among people who want to invest in bricks and mortar, whether that is as a place for themselves to live, or purely as an investment property for rental return or longer-term capital growth.

The prevailing economic uncertainty that has lingered in the UK since 2016 has played a part in driving this demand. Indeed, since June 2016, the country has had three Prime Ministers, two general elections, the fallout from the EU referendum, the formal Brexit process, and of course, the Covid-19 pandemic. In such turbulent times, people tend to gravitate towards so-called ‘safe haven’ assets, and in the UK, real estate falls under that bracket.

The fact that consumers and investors will flock to property in times of uncertainty is not surprising when we consider the long-term performance of bricks and mortar as an asset. According to Land Registry data, the average UK house price rose from £50,000 in 1990 to £250,000 in 2020.

Growth might slow or stagnate, but historic data shows us the undeniable, unrelenting rise in prices. Nearly half of all mortgage lending made in the first three months of this year went to home movers, according to the Financial Conduct Authority (FCA), the highest share since records began.

Around 42% of mortgage lending was advanced to home movers, the FCA said, up 15% from the same period last year, and almost double the share advanced to first time buyers. Home mover demand is thought to be driven by changing priorities as a result of the pandemic, with many people looking for bigger homes and more outside space.

What next for the property market?

The UK housing market requires close attention – there are many ‘boogeymen’ in the background and they have been lurking for quite some time; the rising rate of inflation, possible interest rate rise, will house prices fall? What impact will mortgage payment holidays have when they and the furlough scheme come to an end this year?

We are arriving at an interesting crossroads for the property market. One thing is for sure and we have seen that since the pandemic, the government will do everything in its power to make sure the housing market does not crash. The impact on banks and the wider economy would be significant and it is safe to think that there is likely to be further schemes and measures to support the market.

In my opinion, our housing market should continue to stay resilient. There is a very clear supply issue which will keep prices from falling. This is clearly inhibiting many people from getting onto or moving up the property ladder and this is the issue that the government and policy makers need to address. The UK government has demonstrated their stance and support to the housing market – the stamp duty holiday is proof of that. The benefit of stimulating the housing market can be felt across other sectors too; estate agents, conveyancing firms, moving companies, household goods etc

The property industry is also being incentivised by lenders and government alike as the mortgage guarantee schemes were re-introduced and 95% products came back into the market. There is also a commitment to more new build developments by reforming planning systems. The government has now launched their ‘First Homes’ scheme which will help local first-time buyers (many of whom will be key workers like NHS staff and veterans) onto the property ladder by offering homes at a discount of at least 30% compared to the market price.

The recent Queen’s Speech made prominent mention of the government’s plans to dramatically overhaul the UK planning system; add to that the tapering down of the stamp duty holiday and the hopeful transition out of pandemic restrictions and it will be fascinating to see how the real estate sector progresses.

The pandemic has uprooted the fabric of society and forced governments, consumers, investors and businesses to rethink how they operate. Let us not immediately revert back to the norm – rather, as we consider where the property market will go from its current boom, we should emphasise the importance of creative ideas for change and reform to ensure the entire real estate industry is placed in the best possible position for stable, sustainable progress in the months and years to come.

If you’re concerned by the property market or would like to discuss your options, please contact us on 020 7252 5765.

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