The two key factors that keep driving house prices higher

UK house prices are rising faster than at any time in the last 15 years. And it’s not just in Britain – rising property prices are a global phenomenon. John Stepek looks at what’s behind their seemingly unstoppable rise.

The gradual ending of the stamp duty holiday in the UK was expected to dampen the housing market down a little bit.

Yet, while the tax started to revert to normal levels in July, according to Nationwide, house prices rose by 2.1% during the month of August alone.

That’s one of the biggest jumps in 15 years.

So what’s going on?

Working from home has massively expanded the commuter belt

When you look at the housing market, it’s easy to get too parochial. We all know our own areas and we all think we know our own countries, so we put far too much weight on local factors and not enough on global ones.

(People make exactly the same mistake when stock picking – for more on this and how to avoid it, you should Google Michael Mauboussin and “base rates” – I also cover it in my book, The Sceptical Investor.)

So all through the current boom, a lot has been made about the effect of the stamp duty holiday and how it has brought forward lots of activity, and how things would probably drop off after it was over.

The holiday for the most expensive houses (in England and Northern Ireland, that is) has already ended on 1 July. Meanwhile, an extended holiday for houses under £250,000 ends at the end of September.

So you’d expect to be starting to see the effects of that. But it doesn’t seem to be making much difference, judging by the latest house price figures, which show prices rising by 11% year-on-year in August – an acceleration, not a slowdown.

UK house price indices chart

UK house price indices chart

Yet it shouldn’t come as that much of a surprise. As we’ve said on a number of occasions, the UK’s stamp duty holiday was just one tiny factor in the current booming market. Housing markets around the world are booming, driven by two main things.

One factor is the expansion of working from home. We can natter all day about exactly how many people will end up returning to the office and for how long; we can debate what has been lost and what has been gained in the process; but one thing I think we can all agree on is this: more people will work remotely more regularly than they did before Covid-19 turned things upside down.

In housing-market terms, increased working from home means that the commuter belt is massively extended. In turn, that means people moving from expensive areas (those either in or close to London and Edinburgh, most obviously) to cheaper ones (areas which are beyond a reasonable daily commuting distance – which in the southeast, at least, I’d say is anything over about an hour and a half each way).

So you have people living in expensive but frequently charmless areas who are suddenly keen to move out to less expensive but frequently much nicer areas. These people are price-insensitive as a result – they can’t believe their luck, and nor can the people selling to them.

Again, this is not just a UK phenomenon. It’s happening all over the US, and I imagine it’s similar in Europe, though I haven’t got the figures to hand.

The banks are now locked in a race to the bottom

The “working from home” shake-out will only carry on for so long. And it represents a rebalancing to a great extent – money moving out of urban areas and into suburban and rural areas. This is not a bad thing at all: if cities get a bit cheaper as a result, then they should get an influx of younger folk, and become a bit more innovative once again.

(This might be wishful thinking, of course – London-focused housebuilder Berkeley Group (which I own a bit of) put out a trading update this morning. Apparently reservations are back to pre-pandemic levels. Meanwhile, rising selling prices for houses are offsetting rising materials prices. So maybe London won’t be getting any cheaper from here.)

However, there’s a second factor which is more persistent and also more important: the amount of money available to buy houses.

Interest rates are extremely low – that’s been the case for ages. People (in aggregate) have saved more money that can be used for housing deposits (the Bank of Mum and Dad might have increased its lending power even if the kids haven’t been able to save).

But the big new factor post-pandemic is that banks are finally starting to throw caution to the winds again. We are in a full-blown mortgage-price war and, as I’ve said before, it’s hard to see that changing soon. Once the banking sector gets the bit between its teeth it won’t take just one rate hike to stop it – it’ll take a few.

Remember that the Bank of England was raising interest rates all the way from August 2005 to July 2007 – right before Northern Rock collapsed. And that’s assuming that rates even rise any time soon.

Anyway – long story short, if you’re looking for a home to live in, timing the market is a waste of energy in any case. But for what it’s worth, I don’t see any reason to expect a crash imminently.

If you already own a home and particularly if you’ve got a decent chunk of equity in it – do have a look at mortgage deals. They are dropping fast. The headline-grabbing two-year fixes at below 1% do come with big arrangement fees – and aren’t always open to re-mortgaging – so don’t automatically think that they’re the best deal.

But if you’re coming to the end of a deal or you haven’t checked the market for a while, then do have a shop around, because you can almost certainly find something cheaper than what you’re on right now.

As always, if you don’t already subscribe to MoneyWeek, sign up now to get your first six issues free.

Recommended

Britain’s most-bought shares w/e 1 July
Stocks and shares

Britain’s most-bought shares w/e 1 July

A look at Britain’s most-bought shares in the week ending 1 July, providing an insight into how investors are thinking and where opportunities may lie…
4 Jul 2022
M&G offers a solid 10.1% yield – but future growth is uncertain
Share tips

M&G offers a solid 10.1% yield – but future growth is uncertain

Financial services group M&G has one of the highest dividend yields in the FTSE 100. But it’s a complicated company, and a tough one to analyse, says …
4 Jul 2022
We’re doing well on pensions – but we still need to do better
Pensions

We’re doing well on pensions – but we still need to do better

Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn S…
4 Jul 2022
The income investor’s dilemma
Income investing

The income investor’s dilemma

Pay attention to dividend growth as well as initial yield when picking income trusts, says Max King.
4 Jul 2022

Most Popular

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks
European stockmarkets

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks

Ray Dalio’s Bridgewater hedge fund is putting its money on a collapse in European stocks. It’s likely to pay off, says Matthew Lynn.
3 Jul 2022
UK house prices are definitely cooling off – but are they heading for a fall?
House prices

UK house prices are definitely cooling off – but are they heading for a fall?

UK house prices hit a fresh high in June, but as interest rates start to rise, the market is cooling John Stepek assesses just how much of an effect h…
30 Jun 2022
How to invest in copper, the most important metal in the world
Industrial metals

How to invest in copper, the most important metal in the world

As the world looks to electrify and try to move away from fossil fuels, copper looks set to be the biggest beneficiary. But how can you invest? Rupert…
30 Jun 2022