Q&A: House price growth is holding steady – but will it last?

Our August 2020 House Price Index revealed prices continued to climb. Our director of research and insight, on what the next few months could have in store.

Q. Why are house prices holding firm against a gloomy economic backdrop? 

A. Buyer demand continues to run ahead of the supply of homes for sale, and this imbalance is supporting 2.6% annual growth rate in UK house prices. 

Buyer appetite is 39% higher than at this stage last year. Existing homeowners are becoming increasingly active in the housing market, driven by a once-in-a-lifetime re-evaluation of their home and lifestyle as a result of the pandemic. And although first-time buyer appetite has softened a little, it remains well above 2019 levels.

In addition, the government’s stamp duty holiday has fuelled demand, with nine out of 10 buyers paying no stamp duty at all, saving them an average of £4,500.

And let’s not forget there are few forced sellers because the furlough scheme and mortgage payment holidays are supporting homeowners.

However, the impact of Covid-19 is being felt in the rental market in central London in particular. 

International and national travel and tourism numbers are down, with London airports operating at reduced capacity. You only have to look at Heathrow Airport’s announcement in August, which reported an 88% plunge in July passenger numbers. 

This weaker demand is putting downward pressure on rental growth.

Q. Where are house prices growing the most and why?

A. Our House Price Index shows that the headline growth rate is holding steady at 2.6%. 

But at a city level, Nottingham and Manchester are recording annual house price growth of more than 4%, demonstrating the strength of the cities’ local economies and affordability.

There’s a definite strength in cities in northern England and Scotland, with Leeds, Edinburgh, Leicester, Liverpool, Cardiff and Sheffield all registering annual house price growth between 3% and 4%.

Q. The index has revealed that homeowners are set to overtake first-time buyers (FTBs) as the driving force of the housing market. Why is that? 

A. Yes, first-time buyers have been the driving force for housing sales over the last decade. They’ve been supported by government initiatives, such as Help to Buy. And they’ve also benefitted from increased availability of higher loan-to-value (LTV) mortgages, as lenders sought to grow this sector in the last three to four years.

But this is set to change as we move into 2021. First-time buyers are now being squeezed by restricted mortgage availability, particularly at high loan-to-values, and growing economic uncertainty, making it harder for them to get onto the housing ladder.

Meanwhile, homeowner appetite to sell up and buy elsewhere is rising as the pandemic forces them to re-evaluate their housing requirements. These buyers tend to be equity-rich, with little or no mortgage, making affordability less of a barrier to moving.

Q. Where are FTBs most likely to be impacted by headwinds in the housing market and why?

A. Weakening first-time buyer demand is being driven in large part by the reduced availability of mortgages at, or over 90% LTV. 

But the reliance on high LTV mortgages is not uniform. High LTV lending is most accessible in areas with average or below-average house prices – and so this is where we expect first-time buyer demand to be more affected moving forward.

That’s not to say that London is immune to the effects of reduced LTV lending. And the need for large deposits and a search for space, spurred on by lockdown, may lead to more and more first-time buyers looking outside the capital for their first home.

Q. How will the government’s new restrictions impact the housing market?

A. We’ve already seen how lockdown led to people carrying out a once-in-a-lifetime re-evaluation of their homes and lifestyles, with a focus on prioritising space. And the latest restrictions will continue to support this trend – particularly for those who are more financially secure. 

Q. What do you think the rest of the year holds?

A. We’ve seen more homeowners looking to move home – and this has contributed to sales inventory being 10% higher than a year ago. A greater supply of homes for sale increases choice for buyers, weakening competition, and this will in turn keep house price growth in check.

But although demand has been very strong, it is unsustainable. It’s inevitable that demand will slow down. 

The level of housing sales this year is set to be 15% lower than in 2019 because the housing market simply cannot make up all the ground lost when it was shut during lockdown. 

Q. How is 2021 shaping up for the housing market?

A. There’s typically a three to four month time lag between sales being agreed and completion so today’s deals will run into next year. With buyer demand 39% above the same time period last year, the first few months of 2021 are set to be very busy.

However, the housing market is not immune to wider political issues and economic forces. The continuing Brexit negotiations, the end of the furlough scheme, and the prospect of rising unemployment – these are just some of the factors that will no doubt impact the housing market in the months ahead.