We got proper confirmation of a post-election bounce in the housing market this morning.
Asking prices and housing market activity rose sharply during the past month, according to property website Rightmove.
So is this a “sugar high” from all that pent-up demand? Or is something more fundamental underpinning all this?
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The election relief rally is a short-term driver for house prices...
Rightmove reckons that the average asking price for a house in the UK is now standing at more than £309,000. That’s just about matching the previous record high set in June 2018.
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Meanwhile, the property website says it has seen a 7.2% jump in traffic compared to the same month last year, while agreed sales were up by 12.3% across the UK, and 26.4% in London.
Now, you have to take Rightmove with a pinch of salt. Asking prices are aspirational. A seller can ask what they want for their house – the question is, will buyers pay up?
But like it or not, Rightmove can at least indicate sentiment. And if buyers feel comfortable about setting higher prices, and their agents are relaxed enough about the number of sales they’re getting to encourage them to do so, then it indicates a hotter market.
Also, the Rightmove data is hardly an outlier. The most recent RICS (Royal Institution of Chartered Surveyors) report suggested that buyer demand across the UK is rising at its fastest rate in more than four years.
So what’s going on?
Clearly the leap in activity – particularly in London – is at least partly driven by people deciding that, with the election over, they can go ahead with previous plans.
There’s probably an element of buying from overseas investors too. Anyone who thought the sterling “Brexit discount” would vanish rapidly will have been disappointed. But there’s no doubt that Britain is less politically unstable than it has been since mid-2016.
These are short-term factors. They are purchasing decisions that were delayed and that are now going through.
Does that mean the bounce will fizzle out before long? Or are there other factors that could keep it going?
… but maybe there are some longer-term drivers pushing higher too
Perhaps a better question is this: why did the UK housing market fizzle in the first place? Why did London in particular, take such a big hit over the last four or five years?
And the answer is this: because the government made it more expensive for landlords and overseas buyers to purchase houses.
House prices are primarily driven by one simple thing: the cost and availability of credit. Those dictate the level of buying power in the market. And far more than anything else – yes, including physical supply of property – buying power is what drive house prices.
The cost of buying for landlords specifically has been driven higher in the last four years by regulatory changes. As a result, landlords have been a diminished force in the market.
However, it looks as though those changes might be reaching a trough. The FT cites a statistic from estate agent Hamptons International, which found that the number of private landlords has dropped to its lowest level in seven years. That’s no surprise given the changes to the market.
However, on the other hand, a record proportion – 30% – of the remaining landlords now own more than one home. That’s the logical result of the private housing rental market being forcibly professionalised.
For “amateur” or “accidental” landlords, the carrying cost of a house has become too great. It is no longer feasible to run a buy-to-let as a low-hassle second income stream. But for landlords for whom it’s a business, it’s worth the effort to stay in the market and also to incorporate (owning the properties through a company means you can retain some tax advantages).
If we’re just about through with the impact of the tax changes – and if competition in the buy-to-let mortgage market is picking up (which it is) – then the headwind created by the great landlord exodus may now be past its worst.
The risk is that house prices keep going higher
So where does that leave us?
At the end of the day, if you want to see house prices stagnate or decline (which would be healthy, given how expensive they are), then it needs to become harder or more expensive, or both, for a significant group of buyers to raise the money to buy a house. That’s what happened to landlords and caused much of the stalling in the last five years.
The problem (for anyone who’d rather avoid another boom and bust, which is the big risk) is that there’s no sign of mortgages getting more expensive. You can argue that there’s not much room for them to get cheaper, but that’s only partly true.
Interest rates are at rock bottom levels, for sure. They could fall a bit but unless the economic data deteriorates an awful lot, that seems unlikely. But in boom times, banks compete on other things. Remember the 125% mortgage? Yep, that’s the sort of thing I’m talking about.
I’m definitely not suggesting you go out and buy a wee house somewhere as an investment. That’s a headache, and something to look at as a business decision rather than a punt on house prices.
What I am saying is that there’s a danger that house prices become a political hot button once again, after a brief period in which it looked as though we might get some respite in the market.
That would be bad news – particularly if the government decides that a bout of rising prices would encourage the “feel-good” factor again. You’d like to hope that they’ve learned their lesson – but let’s keep a close eye on the budget (whenever it might happen now) for any housing market measures in the vein of “Help-to-Buy”, just in case they haven't.
