Will Britain’s 2020 house-price boom continue in 2021?

House prices in the UK were hardly cheap going into this year. Yet now, despite the Covid-19 pandemic, they are rising fast. Can it continue into 2021? John Stepek takes a look.

Terraced houses
2020 has proved to be the best year for the UK housing market
(Image credit: © Luke MacGregor/Bloomberg via Getty Images)

Let’s say someone had told you this time last year that within a few short months Britain would suffer the biggest plunge in its economic activity in modern history. What would you guess might happen to house prices? I’m betting that you would assume the same thing as most banks and estate agents did – which is that they would go down, potentially quite hard.

And yet as 2020 draws to a close, it has proved to be the best year for the UK housing market – in terms of activity at least – in a long time. House prices hit new record highs and saw their strongest growth for years, as measured by any house-price index you cared to use, from the mortgage-tracking indices of Halifax (up 7.6% in the year to November) and Nationwide (up 6.5%), to the detailed transaction data of the Office for National Statistics (up 5.4% to October), or even the rather more nebulous “asking-price” data from Rightmove (up 6.6% to December). And this isn’t just about the well-off fleeing the cities for rural properties with bigger gardens or sea views (though that has been a major feature). The boom is widespread, with transactions hitting their highest level in five years in October, according to HMRC.

What really drives house prices

What happened? Pent-up demand has helped – house moves were delayed by the outbreak, so transactions piled up towards the middle of the year. And the stamp-duty holiday introduced by the chancellor, Rishi Sunak, has likely brought forward sales from the future as people rush to beat the March 31 deadline.

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But what this year should really demonstrate once and for all, to anyone who was ever in any doubt, is that the main driver of house prices is the availability of credit. Despite the economic slump and risks to employment, interest rates have remained low and securing a mortgage has – with a few blips earlier in the year – largely remained feasible for most people who are in a position to buy in the first place. As Jim Pickford in the Financial Times points out, lenders might be wary but it is still possible to get a mortgage with a deposit of just 10%. And if you have a larger deposit (or a lot of equity for re-mortgagers), then you can still enjoy rock-bottom rates.

What about 2021?

So what happens next? The experience of previous stamp-duty holidays suggests that sales will slow once it ends (assuming that it isn’t extended, of course). And the exodus from the cities that might have added a bit of feverish fuel to the fire this year is unlikely to be as marked as vaccines are rolled out. Working from home is likely to be a permanent feature of many employees’ lives, but others may find that commuting is still a necessity – or at least more important than it might have seemed during lockdown.

There are other factors that could slow things down a little – Help to Buy becomes less widely available from 31 March, while an extra layer of stamp duty also kicks in for overseas buyers. But if you’re hoping house prices will become drastically cheaper, I have some bad news – it’s hard to see where a crash would emerge from. A surge in interest rates is not on the cards (as our Roundtable participants discuss this week). And assuming that government assistance continues to cushion the worst of the unemployment risk, and that the economy recovers, then we won’t see the scale of job losses that might cause widespread forced selling either. Arguably the biggest “risk” (which would in fact be a good thing) is that inflation starts to rise much more rapidly than expected and begins to eat away at house prices in “real” terms, rendering them more affordable over the longer run. But for now it seems likely that house prices in 2021 will range from flat (if they take a breather) to potentially rather higher (if the economy recovers faster than expected).

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.