House prices in the UK are still rising, despite Covid-19, despite lockdown-induced rampant economic uncertainty, and despite the fact that they were hardly cheap in the first place.
How can this be? Why so resilient? Or, to put it another way: if you’re a frustrated would-be buyer, what’s wrong with our housing market that it can remain oblivious to the worst recession ever?
You might think this is a uniquely British problem. It’s often framed that way. Yet, believe it or not, turns out we’re not that special.
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Guess what? House prices are rising pretty much everywhere
It’s easy to become far too parochial when considering the housing market. We look at Nationwide telling us that house prices in the UK are rising at their fastest pace in four years (up a whole 5% year on year in September, apparently), and we start to pontificate.
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“Hmm. It must be the stamp duty cut.”
“Hmm. It must be Help to Buy.”
“Hmm. It must be the mass exodus of Londoners driving up prices in the shires."
“Hmm. It must be the fact that British people – particularly those in the southeast of the island – are pathologically obsessed with property and simply can’t be cured of this derangement."
These arguments may or may not be convincing. But they have one thing in common – they’re all local to the UK. And yet, the miraculous staying power of residential property is by no means restricted to Britain.
The Economist points out that during the second quarter of this year – ie, the height of coronavirus in most Western countries – house prices in most big economies were higher. “In the rich world they rose at an annual rate of 5%.”
In Germany, notes The Economist, house prices are rising at an annual rate of 11%. (Ah, I remember the days when we used to tip German property in MoneyWeek magazine, and everyone would say “the Germans are different”. No, they just hadn’t experienced 0% interest rates and buckets of quantitative easing at that point.)
Meanwhile, prices in the US are also accelerating higher.
The point is, it’s not just the UK. Indeed, if anything, our housing market has arguably been a bit of a laggard in recent years. And so any explanation that depends on Britain’s unique characteristics simply isn’t sufficient to explain what’s going on.
So… what is going on?
Here’s why house prices are proving so durable
First the obvious one: interest rates are low and they’re not going any higher. This is the one I always flag up. Supply and demand matters for property prices, but I’ve yet to be convinced that physical supply is as important as the supply of credit.
Houses aren’t fungible – they’re not like Tesco shares. Every house is different, and when you find one you like, you want it. Everyone wants the best house they can afford. In this case, the term “best” – on average – will be dictated by some combination of location (particularly commuting time and expense) and size (usually one bedroom fewer than you need).
So you have a group of buyers whose purchasing power is dictated by how much the bank is willing to lend them. This is unusual. When you go out to buy a washing machine, you don’t think: “I’ll just pay the shop whatever the bank will lend me, the more the better”.
Yes, that’s a simplistic comparison, but you get the point. Quite simply, as long as banks are willing to lend increasing amounts of money (even if only to a certain group of people), then buyers will generally pay up to the limit of their borrowing capacity.
That’s a potent force in driving prices higher. And at the same time, low interest rates mean that servicing existing mortgages remains relatively easy. There’s no potential for the sort of massive payment shock that drove a lot of the repossessions we saw in the 1990s crash.
The Economist notes that another two things have made a big difference. On the fiscal policy side, governments across the world have done two things. One, they’ve told banks to go easy on anyone who is struggling to pay their bills. Two, they’ve stepped in to provide people with replacement income (which is only right, given that it’s government action that has shut down the economy in the first place).
Finally, notes the magazine, there’s the fact that the people who are moving are willing to spend more to get a bigger place, because they see themselves working from home in the future.
I’d add that they’re also almost certainly the people who haven’t lost their jobs or feel in fear of them, so this is the group of people who saved money during lockdown on commuting and now feel quite flush. In effect, this is the “London exodus” story writ large across the globe.
So there you go – the UK isn’t unusual. Stamp duty might have made a difference at the fringes in terms of bringing forward sales and the like, but it’s really just a distraction. What matters is that borrowing is cheap, and enough people have money to keep moving.
So what happens next?
What does that mean for the long term? I don’t know. But here’s the bad news for anyone who is hoping for a big crash and a bargain hunt at some point: the most likely way forward is that we eventually come out from under this Covid lockdown. The recovery period will be tricky; a lot of people are going to go from furlough to redundancy and the nature and level of future support is a big unknown. But interest rates aren’t going to go up.
Meanwhile, the most vulnerable industries are already restructuring. In short, the cost of borrowing isn’t going to go up, and there is unlikely to be a huge wave of forced sellers.
I reckon that means we won’t see anything happen to house prices other than a general trend higher. Until and unless inflation becomes an issue and interest rates nudge higher, that is. But that’s a crisis for another day (and one we’ll be writing more on in our upcoming 20th anniversary issue at the start of November – subscribe now so as not to miss that).
