Why UK House Prices are headed for a Cliff Edge

Investment management consultant MATTHEW FEARGRIEVE explains why the economy-defying UK house prices of 2020 and the first quarter of 2021 are nothing more than a Mini Bubble that will burst with the end of the furlough schemes and the stamp duty holiday.


The estate agent hype is as shameless as the price rises are astounding.


Property prices are up considerably on 2020 and 2019 figures, and agents are reporting the busiest first calendar quarter in years, with a 50 per cent increase in transactions in February compared to the same time last year. Fuelled by the stamp duty holiday, which offers buyers tax savings of up to £15,000, house prices have risen steadily, month on month, since chancellor Rishi Sunak introduced the tax holiday in the spring of 2020.


Despite a drop of 0.2% in March, brought about by anticipation of the end of the stamp duty holiday planned for 31 March, prices are now (Spring 2021) some 6 per cent higher than this time last year. With the warmer months of spring traditionally marking the start of the property buying season, and the news in late March that the buyer tax holiday will be extended until 30 June, the demand for homes and the attendant price buoyancy is expected to last at least until then.


Hence the incontinent hysteria of estate agents right now.


With buyer demand reaching mania in some parts of the UK, top-of-the-ladder homeowners buying favours from agents by offering a “buyer premium” of undisclosed amounts (on top of the purchase price, that is), bidding wars pushing up purchase prices considerably in excess of asking prices and, ultimately, demand outstripping available housing stock, it's little wonder that estate agents are cock-a-hoop.


One of the UK’s leading online property markets, Rightmove, sent subscribers an email prior to the Easter holiday, informing them of an unprecedented “rush to Rightmove” as the website registered more clicks in one day than ever before. There followed a (slightly patronising) explanation of why people traditionally use the long Easter weekend to get out and look at property (apparently), after having been cooped up all winter and (presumably) having nothing better to do with themselves at the start of springtime.


Adding fuel to the UK's property inferno is the government’s Help to Buy scheme, which enables those first-time buyers who are able to stump up 5 per cent of the deposit to borrow between 20 and 40 per cent of the purchase price from the government.


We have already issued a warning to first-time buyers about the hidden dangers that lurk within this scheme, which you can read about here.


The hype from all parties with a commercial interest in the UK property market - agents, sellers, brokers, mortgage lenders, etc - is unrelenting and shameless. And so you would be forgiven for getting carried away by the euphoria and for joining the “rush to Rightmove”.


We suggest that you resist this urge.


To buy now would undoubtedly be to buy in a rising market. To have an offer accepted now would, in some parts of the UK, leave you with a doubtful chance of completing the purchase transaction prior to the end of the stamp duty holiday, currently scheduled for the end of June.


In short, to involve yourself at all with the UK property market at any time between now and the end of June (assuming no further extension of the stamp duty relief, that is) would be to embroil yourself in an inflated bubble market, that can only collapse when the government props are pulled out from underneath. Right?


When we last wrote about the state of the UK housing market, in our blog What Next for UK House Prices, we examined the likely effect on house prices of the stamp duty holiday being extended for an additional three months, from end-March to end-June. Estate agent hype was already rife, and we exposed some of the bare-faced untruths being made by property professionals and other interested parties about why it was the "right time to buy".


We discussed how, on the contrary, the fundamental underlying economic essentials and other factors meant that quite the opposite was true. We urged would-be buyers to look beyond the hype and to consider some basic facts of life before joining the rush. You can read more about this in our article Will UK House Prices Rise or Fall in 2021?


Since we wrote that article in March, two things have changed. First, unemployment forecasts have been updated. Secondly, data about the housing market in London have been released. Both sets of data have a profound bearing on the direction and prospects of the UK property market.


UK unemployment forecasts

Over the three months to January, unemployment in the UK fell from 5.1% to 5%. Much was made of this encouraging headline.


But the backdrop to this is that unemployment is expected to rise to 6.5% by the end 2021, once the government’s furlough support schemes - seen by many to be artificially propping up employment levels, just as the stamp duty holiday may be seen to be propping up the property market - are brought to an end. The government spending of billions of tax pounds just cannot go on indefinitely.


As chancellor Sunak has repeatedly warned, all this money has to be paid by somehow, sometime, by the UK taxpayer. The withdrawal of both schemes - furlough and stamp duty relief - will inevitably have a dampening effect on buyer demand and people's appetite to move home, as the cold reality of a world without easy furlough and juicy tax breaks finally kicks in.


So, a drop-off in house sales should be expected after 30 June, assuming the stamp duty holiday is not extended further, and there is a broad consensus that the government will not - indeed, cannot - extend it further.


But how bad will that drop-off be? Will it be just a normalization of property valuations? Or will the coming price dip be something more severe?


It is difficult, on any rational outlook, to conceive of house prices being self-sustaining at current levels after the government kicks away the crutches of stamp duty relief and furlough pay. Just think about the economic fundamentals at play. During the biggest economic slump in modern history, when nine million people were sitting idle at home, their wages paid by the taxpayer, we have had a miracle property boom in which prices have risen 6 per cent.


Something isn’t right. Something has got to give.


London

As ever, London drives the rest of the country’s economy. This has always been true in the housing market, and the (overstated) exodus of workers from the capital doesn’t make this any less true.


Any kind of market crunch in London will likely result in a crunch across the rest of the UK.


London is particularly vulnerable to a depression in its residential property market because the price of houses in the city, as opposed to flats, rose sharply over 2020, while the population of the capital is estimated to have fallen sharply as foreign workers went home in the pandemic. With the vast majority of the capital’s population living in flats, and a number of these currently tenantless or under depressed rental yields, the surge in the price of its much smaller stock of houses last year will have to be corrected. This correction will make itself felt across the whole of the capital's housing stock, flats and houses alike.


A recent report by the London School of Economics opines that there is a “significant risk of [government] policy trying to prop up house price growth [….] together with the fact that the stamp duty holiday disproportionately boosted more expensive houses and housing markets, we would expect [….] a housing market downturn”.


This downturn would, in the view of the LSE, be accelerated by an economic downturn.


Given that the pandemic has brought about the deepest recession in the UK in three hundred years, some economic downturn seems inevitable. You don’t have to be an economist to see that. In such circumstances, how could the miraculous hikes in house prices possibly be sustained?


The LSE’s report goes on to state that, even if the stamp duty and/or furlough schemes were extended (which the LSE considers highly unlikely), the visible effects of the coming economic downturn would merely be deferred.


The support, the props offered by the government - furlough and property tax breaks- are sticking-plasters. They do not, cannot, heal the economic wound that has been, and will be, inflicted by the lockdown of our national economy for more than a year during the pandemic.


What Next for the UK Property Market?

There are those who, with some justification, believe that no UK government will ever allow the property market to collapse, that government intervention is guaranteed when the market starts to drop. After all, the country’s retail banking sector depends on people borrowing mortgages, and being able to repay them. Buying property has become, in the UK - perhaps uniquely in the world, given our national obsession with (the illusion of) property "ownership" - a safe, one-way bet.


That may be true. What is far harder to accept is the blind, unrelenting hype, and the bald assertion that UK house prices are sustainable at current levels. The miraculous gains of 2020 will be subject to an inevitable correction as post-pandemic economic reality sinks in.


The harsher that economic reality, the more severe the correction will be. The deeper our collective arrogance and hubris about property ownership - two distinctly unappealing traits that are characteristic of the British more than of anyone else in the world - the more surely we will be punished by the coming economic reckoning.


MATTHEW FEARGRIEVE is an investment management consultant. You can read his personal finance blog here and see his Twitter feed here. You can read his property blog here and find his Guide to the Help to Buy Scheme for first-time buyers here.




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© 2020 by Matthew Feargrieve.