Recent reports from the HMRC state that the monthly level of property transactions within the UK has peaked since the records began in 2005.
The rise in property transactions has been mainly due to increased domestic demand for housing within the UK because of Stamp Duty Holiday.
The Stamp Duty Holiday which was supposed to end on March 31st has been further extended into the summer meaning that buyers pay less tax on properties over a certain price.
For this reason, opportunistic buyers, as well as large real-estate firms, have likely begun to buy up housing so that they can cash in on the decreased opportunity cost.
At the same time, demand for housing in the UK has increased due to a fall in the value of the pound.
On the 12th of April specifically, London became a hotspot for super-prime mortgage buying as foreign demand was increased due to a weaker pound.
This made UK housing cheaper to purchase in other countries, so, demand for housing also rose as foreign buyers decided to take advantage of the lower opportunity cost.
Therefore, through a combination of both domestic and foreign demand for housing, house prices have increased despite the Stamp Duty Holiday.
The HMRC states that the number of property transactions in March was double that of last year, reaching a total of 180,690, this has consequently caused the average house price to rise by 8.6%, the highest growth since October 2014.
The increased house price will lead to a larger wealth effect for those who have been fortunate enough to buy homes during the pandemic. This is because the value of their assets has increased, which, is especially important for real-estate firms as they will be able to make a higher profit.
However, those who have been unable to cash in on the rising house price, such as first-time buyers, are likely annoyed as some buyers may now be unable to afford a deposit on the home they have been looking at due to the price rise.
This is likely the case as an 8.7% is very significant, that’s almost 10% which would be a mortgage before the new allowance, because of this, first-time buyers will have to save even more to afford homes.
An increase in the marginal propensity to save consumers will consequently reduce aggregate demand as consumer spending accounts for 66% of aggregate demand.
For this reason, we may see a contraction in aggregate demand as first-time home buyers will have to save more so that they can afford a property.
However, the likelihood is that the contraction in aggregate demand will not occur as increased saving of consumers who are in the market for property buying will likely be outpaced the surge of demand which has occurred with lockdown restrictions being lifted.
So, despite the rising house prices, we will likely see an increase in Real GDP in the near future either way.
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Research compiled by Billy Ryan.