House prices in the UK are still surging – here’s why it’ll probably continue

The latest UK house price data shows no letup in the country’s booming property market, with the biggest yearly rise since 2014. And there’s no end in sight yet, says John Stepek. Here’s why.

Houses in Guildford
People are heading to country towns for more space
(Image credit: © Luke MacGregor/Bloomberg via Getty Images)

UK house prices (and those across the globe) appear to have done rather well during lockdown. Now that the economy is opening back up, can that continue? Unfortunately for anyone who wants to buy an affordable property in the near future, the answer appears to be “yes”.

There are an awful lot of house price indices in the UK, which is one reflection of how obsessed we are with them. The best-known ones are probably the Nationwide and Halifax indices. They’ve both been running for a long time and they both cover roughly the same stage of the process – they’re both based on data from approved mortgages. In other words, deals could still fall through but you’re far enough into the process that the price is pretty accurate, rather than aspirational.

Rightmove asking price data is also quoted widely. Clearly, this is based on listings for properties and therefore reflects seller aspirations rather than actual prices. There are lots of other indices too.

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But the official one comes from the Office for National Statistics. This one uses data from the Land Registry, so it comes from actual sales. The latest reading from February shows that house prices rose at an annual rate of 8.6% in February. That was the highest seen since October 2014, and considerably above the rate of inflation.

UK house price indices chart

(Image credit: UK house price indices chart)

The death of the commute and the rise of the towns

We already know some of the factors driving this. As the ONS points out, “the pandemic may have caused house buyers to reassess their housing preferences.” Detached home prices rose by 9.1%, compared to 6.7% for flats – people want bigger spaces.

There is also a “death of the daily commute” trend still in effect here. This takes a number of forms. The obvious one is people moving out of big cities (mostly London) to take up more space in bucolic provincial towns (I note that The Telegraph has just put out a listicle of “21 fashionable ‘it’ towns that you can still afford to move to”).

Apparently the gap between the valuation of a central London property and a luxury country property is at its narrowest since 2010 (it’ll cost you 2.4 times as much to live in central London as in a country mansion, compared to three times in 2014).

Also note that on average, London prices rose by “just” 4.6%, by far the lowest of all English regions (the northwest of England saw prices rise by nearly 12%).

A slightly less obvious one is companies deciding to relocate outside of London (because the property – and staffing – is expensive) for premises in less expensive cities (Birmingham has been a big beneficiary – Goldman Sachs has decided to open a global software development site there, rather than Amsterdam or Paris, for example).

Much of this was already happening, but it’s only likely to be given an added impetus by the fact that the daily commute is no longer such an issue. That’s likely to last – it’s not clear how much commuting has changed yet (some companies are very keen to get everyone back in the office – others have already embraced the shift) but the average has almost certainly moved permanently.

Another obvious factor in the UK is the stamp-duty holiday. This is clearly bringing some demand forward and the extension announced in the spring Budget has kept the sugar rush going.

It’s ultimately the same story as usual – cheap and cheaper money

However, some of it also just comes down to the same old point we’re always making: there’s a lot of money sloshing about it, and increasingly it’s making its way into property.

Here’s an interesting thing, for example: everyone has been focusing on the government’s latest scheme to prop up the market – taxpayer-backed 95% mortgages. But as property commentator Neal Hudson of points out, Nationwide has just released its own “help out first-time buyers” scheme.

Nationwide – which, it’s worth noting, is typically a pretty cautious/responsible lender – is now offering first-time buyers the chance to borrow up to 5.5 times salary as long as they have a 10% deposit, and are taking out a five or ten-year fixed-rate mortgage. There will be £1bn-worth of the loans available.

One key aspect here is that Nationwide has clearly squared this with the regulatory regime. So that probably means that other banks will follow suit.

If we continue to see lending on mortgages becoming more easily available, then it’s very hard to see how house prices might fall. As always, the key indicator to watch here is credit availability and so far, that’s not getting tighter.

In the longer run, the ideal is that inflation starts to accelerate properly, so that you get wages rising faster than house prices. So house prices go down in “real” terms (ie after inflation). That means affordability improves.

It also means that in reality, the value of the house has gone down. However, it goes down in a less painful manner than if the actual price fell in nominal terms. Why? The key benefit is that you don’t get a disruptive correction.

The problem with house price crashes (and property crashes in general) is that banks lend lots of money to people to buy property. If prices crash, it means the collateral underpinning the loans is no longer as secure. That in turn makes banks more wary of lending money. So a house price crash is a deflationary event. In turn, that’s one reason why governments aren’t going to want one to happen.

What does this mean if you want to buy a house? Well, I’ve explained before that timing the market if you’re looking for a house to live in, is a self-destructive idea. Here’s what really matters. So don’t worry about that.

As I’ve said before, if you’re looking to rent or you’re already renting in London or big cities, that’s probably where your best value bets are. Don’t be shy to negotiate – renters don’t often have the upper hand so take advantage.

And if you’re thinking about investing... well, that’s a tough one. But for more on this, you should listen to Merryn’s latest podcast with Peter Spiller of Capital Gearing investment trust. They discuss financial repression and whether or not a more inflationary environment would mean that houses might be a good investment. You can listen to it here.

Until tomorrow,

John Stepek

Executive editor, MoneyWeek

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John 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. John joined MoneyWeek in 2005.

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.