One of the big(gish) surprises of 2020 was how rapidly house prices rebounded from the impact of the Covid-19 pandemic.
It helped that a stamp duty holiday gave anyone who was thinking of reconsidering their move a good incentive to keep going. It helped that the furlough scheme alleviated the worst of the employment risks, helping to keep the mortgage market open. And it helped that being at home made everyone start thinking about moving somewhere nicer or bigger or more rural. It also probably helped that people who were still earning money had few of their usual outlets to spend it on.
It was looking briefly as though 2021 might see the pace of rebound cool off a little. But after the latest Budget, that seems like a forlorn hope. For a start, the stamp duty holiday has been extended until the end of June. That’s partly to make sure that all the people who have already bought will get in under the wire in time to make the saving.
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Also, at the lower price bracket, the extension will continue after 30 June until the end of September, with no one paying stamp duty up to £250,000 (rather than £125,000) – although bear in mind that first-time buyers don’t pay stamp duty up to £300,000 in any case (note that this only applies in England and Northern Ireland – stamp duty is devolved in Scotland and Wales and it’s not yet clear whether those governments will follow).
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So any post-stamp duty holiday is going to be pushed back. We can also expect more pressure on prices to go up (if, as a buyer, you don’t have to pay £10,000 in stamp duty, then at least some of that money gets added to the pool you use to buy your house, so you’re not necessarily saving the whole lot, or even most of it – the seller is most definitely getting a chunk).
This of course leaves us with the problem (not one that’s unique to Britain right now) of affordability. That is, house prices are still very expensive by historic standards. And that’s causing a lot of discontent. The fundamental difficulty here is that house prices are driven by the availability and affordability of mortgages. That’s it – you can play around with physical supply and demand as much as you like, but the most important variable for prices is the amount of money available to buy the house (look at prices in the rest of the world if you struggle to appreciate this).
That in turn is mostly dictated by interest rates. Rates are going to remain low for the foreseeable future simply because governments can’t afford for them to go up – there’s too much debt out there. And that’s not to mention how existing homeowners would react were the price of their biggest asset (in most cases) to plunge suddenly because of a rise in rates.
So the route pursued by governments has generally been to make it easier for first-time buyers to get into the market, rather than one which does anything about making property more affordable. And of course, that’s what the government has chosen to do here, with the other big property move in the Budget – the decision to encourage mortgage lenders to offer loans to people with small (5%) deposits, by offering taxpayer guarantees.
These 95% mortgages are available to any buyer of a house worth up to £600,000. So this isn’t just for first-time buyers, and unlike Help to Buy it’s not limited to new builds. The loans will be available from April and the scheme is set to run up until the end of December 2022.
What it boils down to is that banks will make the loans safe in the knowledge that the taxpayer will guarantee the loan if the homeowner defaults on it. The buyer has no such protection, but just has to hope that house prices stay high enough for long enough to avoid being tipped into negative equity at the wrong moment.
Given that the government is clearly keen to keep house prices propped up, perhaps this is a good bet. And perhaps if you’re buying a house to live in, all you should be worrying about is whether or not it suits your personal situation.
As for affordability overall – the only semi-painless (and “semi” is doing a lot of work in that phrase) way to make house prices genuinely more affordable is for inflation (and wage inflation specifically) to rise faster than house prices. That way you get a decline in house prices in “real” terms (ie, after inflation).
You don’t get the sort of damage to household and bank balance sheets that a drop in nominal prices would cause. But at the same time houses become more affordable, in turn lessening one of the most obvious sources of wealth inequality.
Inflation almost certainly forms part of Rishi Sunak’s big plan for getting Britain’s public finances back to some semblance of good health. So perhaps we’ll get lucky. But for now, it looks as though house prices are only going to continue to go up this year.
