House prices soar as the UK grows in confidence

With the relieval of stamp duty on housing now extended to the summer of 2021, coinciding with interest rates at an all-time low of 0.1%, it is now cheaper than ever to buy a house, causing a huge increase in demand, especially from first-time buyers and homeowners wishing to move to a larger building as realised from working from home during the pandemic. Robert Gardner, the chief economist at Nationwide, said: “the extension of the stamp duty holiday in the budget prompted a re-acceleration in April.” Nationwide stated that the increase in savings, during the lockdown, allowed first-time buyers to be “better placed to afford a home” (BBC) This, in turn, has caused an increase in the price for housing, as the average UK house price was up by 7.1% (nationwide) in April 2021 compared to the same month last year. Halifax however estimates this at 6.5%. Nonetheless, this is a significant rise in the price of housing, making builders and manufacturers more incentivised to increase the supply and in turn build more houses.

The average price for housing across the UK now sits at £238,831, which has risen by £15,916 from last year. This has increased by 2.1%, compared to March. The 2.1% increase is the largest monthly increase recorded since 2004 (17 years)

This can be directly illustrated in a diagram from trading economics,

This has been seen as a triumph as the monetary policy committee of the bank of England have lowered the base rate in order to increase consumers marginal propensity to consume, as opposed to save, and so are more willing to take out a mortgage on a house due to the low mortgage product rates as of late. This therefore means that there has been a large increase in consumer spending, which composes 66% of aggregate demand in the UK economy, leading to an increase in real GDP, and therefore the inflation rate which has increased from 0.4% in January to 0.7% in March.

According to a report from Reuters, “The tax break had been due to expire at the end of March. But the first £500,000 ($697,050) of any property purchase in England or Northern Ireland will now remain exempt from stamp duty land tax until the end of June, and there will be a 250,000-pound tax-free allowance until the end of September.” This was announced in July 2020, to help the housing market after the pandemic wreaked havoc. Following on from the previous point mentioned, this breeds confidence within the market, as consumers are being flooded with incentives that now is the time of your life to buy a house. The government is pushing for a large increase in consumer spending to combat the effects of our recessive period last year, with the UK’s GDP currently resting at 1.3% for Q4 of 2020. Therefore the increase in house prices can in fact play a vital role in the UK’s economic rebound as we begin our own recovery phase of the business cycle.

On the contrary, nationwide states that, “High demand and low supply could create a super-boom (for houses)”, which will therefore push house prices up above the typical market values which would thereby create potential negative equity in the future when demand drops. This is a prevalent issue as consumers subsequently owe more than the worth of their property, decreasing their chance of being able to move up the housing ladder as they have lost potentially substantial amounts of money, also decreasing overall standard of living. As well as this, people who pay low-interest rates may gain hyper-confidence, as become used to paying low mortgage rates, and if interest rates were to rise once more, this could make their mortgage repayments unaffordable, and lead to a possible increase in repossession of housing and also consumer debt. But this is being combated by the government who are now encouraging lenders to offer first-time buyers 95% mortgages by offering a guarantee scheme running until the end of 2022,

However, “Howard Archer, an economist at consultants EY ITEM Club, forecast that annual price growth would tail off towards the end of the year and that prices could fall on a quarterly basis. “ (Reuters) This would mean that house prices could, in fact, stabilise once more and mitigate the impact that this could have on hyper-confident first-time buyers and other consumers at risk of negative equities. He further said that: "We believe the strength of the housing market is excessive relative to the economic fundamentals, and the level of price increases will ultimately prove unsustainable.”

This in judgement shows that the rise in the price for houses is very important for at least short term recovery and to kickstart the UK’s consumer confidence and economic rebound. Although factors such as a super boom and hyper confidence can reduce the benefits that rising house prices have, many reports suggest this is a short term issue and in fact, the long term success of recovery will inevitably outweigh this, which is essential after the detrimental effects COVID-19 has had on the UK economy.


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Written by Euan Taylor

Research compiled by Billy Ryan


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