The UK housing market

By March 31, 2022Financial Planning
Houses in bubbles representing UK housing market bubble

It was just over two years ago since Prime Minister Johnson announced the first national lockdown to combat the spread of Covid-19. Global growth slumped and a deep recession ensued, as businesses and individuals relied on Government and Central Bank support for survival. Following a sharp slowdown in property transactions during the Spring of 2020, Chancellor Sunak announced a Stamp Duty holiday, removing Stamp Duty on properties up to £500,000. This helped reflate the flagging housing market, together with a trend amongst homeowners to look for properties with gardens and home offices.

Last year saw house prices continue to post significant growth following the rebound later in 2020. According to Nationwide, the average UK house price increased by 10.4% in 2021, the highest rate of growth recorded for 15 years. Considering the further lockdown seen in the first quarter of 2021 and continued uncertainty over new Coronavirus variants, these gains appear somewhat irrational. That being said, the extension of the Stamp Duty holiday, low borrowing costs and an imbalance between supply and demand appear to have combined to drive prices higher still.


How sustainable is house price growth?

Fast forward to 2022, and in the first two months of the year at least, the trend appears to be continuing, with Nationwide reporting house price growth of 0.8% in January and 1.7% in February. But is this really sustainable, or are we on the verge of a rapid slowdown in the housing market?  According to the Building Societies Association (BSA) Property Tracker March survey, it would appear buyers are becoming increasingly concerned.

The BSA Property Tracker survey, which is carried out quarterly by YouGov PLC, showed just 18% of those surveyed in March thought it is a good time to buy property in the UK. This is the lowest figure reported since the survey was introduced in June 2008. Perhaps unsurprisingly, fears over the increasing cost of living generally, the conflict in Ukraine, and the impact of sanctions on Russia on global energy and fuel prices were highlighted as key concerns.


Higher costs squeeze affordability

We have warned clients that inflation was likely to increase since early in 2021, although our early estimate that inflation could peak in the Spring or Summer of this year now looks highly unlikely, largely due to the effect of the Russian invasion of Ukraine on global commodity prices. UK Consumer Price Inflation reached 6.2% in the 12 months to February 2022 and this is likely to go higher still as the year progresses.

Given the higher inflation numbers, the Bank of England has now raised Base interest rates at three successive meetings, from 0.10% to 0.25% on December 16th 2021, and agreeing two 0.25% increases in February and March, with the Base Rate now standing at the same level as it was before the pandemic. There are six further Monetary Policy Committee (MPC) meetings scheduled for 2022, and given the heightened inflationary expectations for the remainder of this year, we would not be surprised to see at least three more hikes in Base Rate before the end of the year.

The increase in Base Rates will, of course, feed into higher mortgage rates, both for those on variable rates and those with fixed rate deals that come to an end. Just over seven months ago, five year fixed rates could be obtained at just 0.99%, whereas the best deals in the market are almost double the rate at 1.82%.


Confidence on the wane

With higher costs of living impacting on household finances, it is little surprise that UK consumer confidence is starting to falter. The GFK Consumer Confidence barometer fell to -31 in March 2022, to stand just above the levels seen at the start of the pandemic, and when asked about their forecast for personal finances over the coming 12 months, respondents indicated that they were more negative now than at the height of the pandemic and also more pessimistic than they were during the Financial crisis in 2008.


Supply imbalance about to correct?

Much of the house price growth seen over the last decade has been a result of cheap borrowing costs, but also an imbalance between demand and supply, as housebuilding generally failed to keep up with demand for housing.

With prices potentially coming under pressure due to increased costs of living, could we see a increase of properties on the market as sellers hope to cash in before confidence weakens? It is too early to tell, although some investors with Buy to Let properties may decide to take advantage of current prices, particularly given that rental yields are likely to have fallen over time.

As a reminder to those who are considering selling second homes or investment properties, Capital Gains Tax on disposal needs to be paid to H M Revenue & Customs within 60 days of the property sale completing. This is less onerous than the 30 day payment window in place between 6th April 2020 and 26th October 2021, however sellers should be aware that tax due needs to be settled within the 60 day window to avoid penalties adding to the tax due.


Time to reassess property portfolios?

The UK housing market has defied gravity since the start of the pandemic, although it is becoming apparent that confidence could weaken significantly as 2022 progresses. Higher inflation and hikes in borrowing costs could see the imbalance between demand and supply ease and slow down the pace of growth. For anyone holding property investments, it may be time to reassess existing portfolios in light of the extraordinary gains seen over recent years.


If you are interested in discussing the above with one of our experienced financial planners, please get in touch here.


The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.