- The Land Registry/ONS reported that house prices increased 0.7% month-on-month in August, lifting the annual increase to 2.5% from 2.1% in July. Prices in London climbed 0.9% month-on-month and 3.5% year-on-year in August
- House prices have strengthened as housing market activity has maintained the buoyancy evident since pent-up demand was released by the easing of restrictions from mid-May. This trend has been reinforced by the Chancellor raising the Stamp Duty threshold to £500,000 from mid-July through to 31 March 2021
- The EY ITEM Club suspects the current upside for the housing market will prove unsustainable due to challenging fundamentals for consumers
- The EY ITEM Club expects the housing market to come under increasing pressure over the final months of 2020 and start of 2021 when there is likely to be a significant rise in unemployment. There is also likely to be a fading of pent-up demand. Renewed restrictions relating to increased COVID-19 cases may also have some dampening impact on housing market activity
- Some temporary support in Q1 will likely come from buyers looking to take advantage of the Stamp Duty threshold increase before it ends on 31 March – although there is always the possibility that the Chancellor could extend it in next year’s Budget
- The EY ITEM Club suspects that house prices could be around 5% lower than now by mid-2021
- The EY ITEM Club expects housing market activity to gradually improve over the second half of 2021, allowing prices to stabilise and then start to firm as the labour market improves and the UK’s economic recovery continues. Very low borrowing costs should also help matters with the Bank of England unlikely to lift interest rates from 0.10% during 2021
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The Land Registry/ONS reported the year-on-year increase in house prices rose to 2.5% in August after dipping to 2.1% in July from 2.7% in June. It has picked up from 1.0% in April but remains just below the 2020 peak of 2.9% in March (the largest increase since September 2018).
“House prices rose an unadjusted 0.7% month-on-month in August. This followed increases of 0.5% in July and 1.8% in June. Prices had risen 0.3% month-on-month in August 2019.
“London prices rose 0.9% month-on-month in August; the annual rate of increase picked up to 3.5% in August after dipping to 1.4% in July from 2.5% in June. The 2020 peak was March’s level of 3.9%, which had been the strongest rise since April 2017.
“It needs to be borne in mind that the Land Registry/ONS measure of house price inflation is based on completed housing transactions. The ONS observed that typically, a house purchase can take six to eight weeks to reach completion.”
Outlook for the UK housing market
Howard Archer comments: “The EY ITEM Club suspects the current pick-up in activity and firming of prices will prove unsustainable before long, with the upside for the housing market being limited by challenging fundamentals for consumers.
“Many people have already lost their jobs, despite the Government’s supportive measures, while others will be concerned that they may still end up losing their job as the furlough scheme ends. Additionally, many incomes have been affected. Consumer confidence is currently still low compared to long-term norms and many people are likely to remain cautious for some time to come when making major spending decisions such as buying or moving house.
“The EY ITEM Club suspects that the housing market is likely to come under pressure over the final months of 2020 when there is likely to be a marked rise in unemployment as the furlough scheme draws to a close in October. While the Chancellor’s Job Support Scheme announced in late-September should have some limiting impact on the increase in unemployment in late-2020/early-2021, a significant rise in unemployment still looks more likely than not. This will not only adversely affect the fundamentals for house buyers, but could also fuel caution on committing to buying a house.
“There is also likely to be a fading of pent-up demand on activity. COVID-related renewed restrictions may also have some dampening impact on housing market activity.
“The EY ITEM Club expects the housing market to remain under pressure over the early months of 2021, though some temporary support in the first quarter will likely come from buyers looking to take advantage of the Stamp Duty threshold increase before it ends on 31 March – although there is always the possibility that the Chancellor could extend it in next year’s Budget.
“Consequently, the EY ITEM Club suspects that house prices could be around 5% lower than now by mid-2021.
“The EY ITEM Club expects housing market activity to gradually improve over the second half of 2021 allowing prices to stabilise and then start to firm as the labour market improves and the UK’s economic recovery continues. Very low borrowing costs should also help with the Bank of England unlikely to lift interest rates from 0.10% during 2021.”
Halifax and Nationwide both reported further pick-up in house prices in September
Howard Archer observes: “Both Halifax and Nationwide have reported strengthening house prices in September. Halifax reported house prices rose 1.6% month-on-month in September, as they had done in August. The annual rise in house prices rose to 7.3% in September – the highest since June 2016 – from 5.2% in August and 3.8% in July.
“Nationwide reported that house prices rose 0.9% month-on-month in September after a gain of 2.0% in August. The year-on-year change in house prices climbed to a five-year high of 5.0% in September from 3.7% in August and 1.5% in July.”
Housing market activity has picked up markedly since restrictions started to be eased in mid-May, reinforced by the Stamp Duty break
Howard Archer adds: “Housing market activity has progressively picked up since the easing of the lockdown restrictions that had held back the housing sector started in mid-May in England and then progressed across the UK.
“The lift to housing market activity coming from its re-opening was then reinforced by the Chancellor’s raising of the Stamp Duty threshold to £500,000 from mid-July until 31 March 2021.
“Nationwide has also observed that “Behavioural shifts may also be boosting activity, as people reassess their housing needs and preferences as a result of life in lockdown.”
“Nationwide said that “Interestingly, around 10% of those surveyed in September said they were in the process of moving as a result of the pandemic, with a further 18% considering a move for the same reason. This pattern was evident across the country, especially in London. Of those moving or considering a move, around a third (35%) were looking to move to a different area, while nearly 30% were doing so to access a garden or outdoor space more easily.””
Howard Archer adds: “The Bank of England reported that mortgage approvals for house purchases accelerated for a third month running in August to be at a near 13-year high of 84,715. This was up from 66,288 in July and a record low of 9,285 in May.
“The monthly RICS residential monthly survey for September observed that its findings “continue to point to a strong upturn in activity across the market, as indicators on enquiries, agreed sales and new listings all remain strongly positive.””