The UK housing market is booming – here’s one thing that could slow it down

UK house prices continue their rise, with a big increase in activity. The boom may seem unstoppable, says John Stepek, but there is one thing that might just apply the brakes. 

Property for sale signs
The housing market is a hive of activity right now
(Image credit: © Luke MacGregor/Bloomberg via Getty Images)

The UK housing market is booming. That’s the conclusion of the latest report from the people at the coal face – the estate agents and surveyors. I’m starting to think that only one thing might be able to calm this market down – a cure for Covid.

The Royal Institution of Chartered Surveyors (Rics) just put out its housing market update for October. Rics is a bit different to most of the other house price indices – it’s based on the observations and expectations of estate agents and surveyors. So it doesn’t tell you what the average house price is, or how much it went up by. Instead, it gives you an idea of what property market professionals on the ground are seeing around them. So you can get an idea of, on balance, are house prices going up or down, and how strongly are they going up or down? And how optimistic or pessimistic do the people at the sharp end feel?

It’s been around for long enough to be reliable, and it gives a more timely idea of what’s going on in the housing market than the Nationwide or Halifax surveys, which rely on mortgage data. So what does it say right now? I mean, there’s no other way to put it – the UK housing market is booming.

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The UK housing market is a hive of activity

The survey found that a net balance of 68% of contributors reckoned that house prices rose in October. That’s the strongest reading since September 1999. In other words, the reading never became that positive during the early 2000s boom.

Yes, it’s an inexact science, but it’s pretty striking. And it’s widespread. Lots of enquiries from buyers, lots of sales, lots of new stuff going on the market. So while prices may well be being skewed to an extent by the types of houses being bought and sold, the overall picture is of a healthy market.

Will it last? That’s where the pessimism comes in. As the Rics report puts it: “respondents appear doubtful that this rate of house price inflation can be sustained… at the 12-month time horizon, respondents expect a much flatter trend in house prices to emerge”.

You can understand why surveyors and estate agents are hedging their bets. The last thing you’d have intuitively expected to come out of an economic shutdown would be a booming housing market. Indeed, there were plenty of predictions – from mainstream analysts – for significant price falls by the end of the year. No one can quite believe what’s happened. So now everyone is waiting for the nasty surprise to come. And clearly, rising unemployment is an obvious risk.

Here’s what could calm the market down: having other things to spend on

However, I’m not convinced that unemployment is going to be the biggest issue for the housing market. As I’ve said before, the people who are currently buying homes are on average going to be people who feel relatively secure in their jobs. If they still have their job at this stage, they’re unlikely to lose it at this point in the pandemic.

Perhaps more importantly, interest rates are not going up. Mortgage lending might have tightened significantly for first-time buyers due to banks’ fears of bad debt. But if the economy starts to improve, the credit strings will be loosened again. Particularly if the government does go ahead with its efforts to create long-term 5% deposit loans for first-time buyers.

The other issue – the fact that the stamp duty holiday has accelerated and encouraged purchases, adding fuel to the fire of the pent-up demand created by the early lockdown – might well lead to a lull early next year (the stamp duty holiday ends in March).

But will the chancellor want that? I’ll be interested to see what Rishi Sunak comes up with. On the one hand, he’s reviewing capital gains tax (CGT) which could end up going in a number of ways, some more disastrous than others depending on whether or not he decides to make the system even more complicated than it already is. On the other hand, he’s talking about ways to buoy the economy coming out of the second lockdown. It’s very rare that a chancellor doesn’t take the housing market into consideration when trying to think about how to make the Great British consumer get out and spend.

What will be more interesting to watch is the market reaction once the virus has dissipated (which will happen at some point, vaccine or not). The urban exodus is certainly continuing for now. London rents (plus – to a much lesser extent – those in Scotland, which I suspect is mostly affected by Edinburgh) are expected to continue to fall in the next few months. But will working from home form as big a part of the “new normal” as we might have thought? Will the flight from the capital go into reverse as people regret uprooting themselves to the countryside?

And what happens when people are able to spend their money on “normal” things like going out and going on holiday and the other routine “big ticket” purchases that haven’t happened this year? A lot of that money has been diverted into home improvements and clearly, into home moves. Perhaps the one thing that will really calm the market down, is simply the fact that we’ll have other things we want to spend our money on next year. Short DIY, long package holidays, anyone?

We look more at the idea of a “Roaring Twenties” in the next issue of MoneyWeek, out tomorrow. Subscribe now to get your first six issues free.

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.