We’re in another house price boom. How long will it last?

UK house prices are in full-on boom mode again. And booms can last a lot longer than you might expect. John Stepek looks at what’s driving the current one, and how long it might last.

House sold sign
House prices outside London are rising the fastest
(Image credit: © ADRIAN DENNIS/AFP via Getty Images)

I don’t think anyone can deny it: Britain’s housing market isn’t just rebounding from coronavirus, it’s in a full-blown boom mode.

One of the UK’s biggest housebuilders, Vistry Group (formerly known as Bovis), has just raised its 2021 profit forecast to £325m, after saying just two months ago that it expected to make £310m.

Meanwhile, net mortgage lending hit a record in March, according to Bank of England data going back to 1993.

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So how long can the boom continue?

This boom could be good for London – because it’s being left behind

There are lots of drivers behind the current house price boom. There’s the stamp duty holiday which has helped to fan the flames, by bringing forward purchases that would have been made later.

That’s temporary, of course. But there is also a lasting Covid-19 effect. This is about people rethinking their priorities and moving home in order to take advantage of newly flexible work arrangements.

You might be sceptical about the extent to which the “death of the office” is permanent, and I’d agree with you. But when it comes to commuting, even one extra “work from home” day a week – one that you can rely on, and that you can be reasonably sure will move jobs with you if necessary – increases your commuting radius dramatically.

In terms of “location, location, location” this is the single biggest change to the structure of the UK housing market over the past year. It’s been driven by the accelerated change created by Covid-19, and it’s one of the things that’s likely to stick.

It’s also one of the main reasons that the “London premium” is at its narrowest for eight years, according to the latest Rightmove asking prices data. Asking prices in the UK capital have risen by just 0.2% since March 2020 (so actually, they’ve fallen in “real” – ie inflation-adjusted terms).

This is not so surprising, given that rents in London are down – according to the latest Hamptons Lettings Index – by as much as 20%.

This is a fascinating topic in itself, and arguably a positive thing. London has been the UK’s affordability flashpoint for years now. If younger people start to feel that they can actually afford to live there again, then that’s no bad thing.

If cities are really going to maintain their “hub” status as centres of innovation and all the rest of it (I think we could have a good debate about this and I’m still not sure which side I fall on) then one thing’s for sure – there has to be room for a constant influx of fresh energy, rather than stasis.

But that’s for another day. There’s another, much more old-fashioned reason for property booming right now: money.

It’s all about how happy the banks are to lend

Why are house prices soaring so rapidly? “Displacement” from London (and to a lesser extent, Edinburgh and a few other big cities) is one driver, where people sell a very expensive house and feel flush when they go out into the suburbs and the countryside, and so pay over the odds.

But there’s also a sheer “weight of money” argument. In aggregate, a lot of people saved a lot of money during lockdown. And chances are, given the way these things work, those people are disproportionately represented among homeowners or would-be homeowners.

We’ve already seen that a lot of money has been spent on DIY and the like. For example, Topps Tiles this morning reports that it saw record sales in the last three months of 2020. It took a hit during the first-quarter lockdown, but since branches re-opened in mid-April, like-for-like sales are up by nearly 17% compared to the same period in 2019.

If all of this money has been spent on doing up houses, just think of what’s being spent on buying houses.

And of course, we can’t ignore the most obvious factor – cheap credit. As we always point out, the main driver of house prices is supply and demand. But not of houses – of the money and credit available to buy houses.

One thing drives this more than any other: the willingness and ability of banks to lend against housing, and the price at which they are willing to lend.

It’s important to understand this. You can look at the Bank of England (BoE) interest rate, and that does matter a lot, but it’s not the be all and end all. Banks also tend to behave pro-cyclically. So when everyone is scared, it doesn’t matter if the BoE’s main rate is sitting at 0.5%, the banks won’t be writing anyone mortgages at that price.

But when everyone is excited and house prices are shooting up, banks get excited too. Property is a lovely thing to lend against – if the borrower fails to pay you back, you get to keep the house. It’s a no-lose situation (when times are good). So they start to compete to attract homebuyers.

That exuberance translates into rising mortgage availability and lower mortgage rates. We might all be pondering the risk of inflation and rising bond yields, but that hasn’t stopped TSB from just putting out a 0.99% two-year fixed rate mortgage. As the Mail reports, we haven’t seen two-year fixes that low since 2017.

As we saw prior to the 2007-2009 crash, this exuberance can hold up even in the face of rising BoE rates for quite some time. Once a boom gets going, it’s not so easy to stop.

So what’s next? I mean, we’ll reach a point where it all deflates again. That’s what happens during booms. But they usually last longer than you expect. And with both the government and central bank reluctant to rein in the economic good times when they’ve just got going, I can see this being allowed to go on for some time yet.

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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.