Opinion: Coming down to earth

The housing market has been in a world of its own during this pandemic, going from strength to strength while the real economy has been on fire. At last, it seems that a 10 per cent annual contraction in UK GDP and weak labour market conditions seem to be catching up with house prices. Richard Dawson explores

The UK housing market’s divergence from the economic fundamentals of COVID-19 looks to be at an end.

After six months of stunning growth, fuelled by the Government’s stamp duty holiday, house prices fell by 0.3 per cent between December and January – the first month-on-month decline since last June.

According to Nationwide’s House Price Index, annual house price growth slowed to 6.4 per cent from a stratospheric 7.3 per cent in December.

The slow down can be attributed to a tapering of demand ahead of the end of the aforementioned stamp duty holiday, which is expected to expire on March 31.

The holiday has supported house prices remarkably at a time of extreme economic crisis, but it looks as though that crisis may be starting make its presence felt in the market.

The average price someone would be expected to pay for a house in the UK was £229,748 in January, down from £230,920 in December.

For home sales up to the value of £500,000, no stamp duty has been payable since last July.

This has incentivised a number of homeowners to bring forward their purchases, as has the pandemic itself by causing many people to reconsider their housing needs.

Lifestyle changes have triggered a process of de-urbanisation whereby many city dwellers have relocated to less densely populated areas, areas with more natural assets and areas with different property types.

De-urbanisation will likely continue to stimulate housing market activity for some months to come as people look to continue working from home even when the pandemic is over.

But, for now, a period of adjustment is taking root after an extraordinary expansion in 2020.

Robert Gardner, chief economist at Nationwide, said: “The typical relationship between the housing market and broader economic trends has broken down over the past nine months.

“This is because many peoples’ housing needs have changed as a direct result of the pandemic, with many opting to move despite the sharp economic slowdown and the uncertain outlook.

“Indeed, the total number of mortgages approved for house purchases in 2020 actually exceeded the number approved in 2019, and house price growth ended 2020 at a six-year high, even though the economy was probably around 10 per cent smaller than at the start of 2020, with the unemployment rate around a percentage point higher.”

This is the concern moving forward. As labour market conditions look set to get worse before they get better, and as the stamp duty holiday is withdrawn, the resulting decline in demand could well put the UK housing market into correction territory, erasing many of the gains made in 2020.

The Chancellor has been urged to extend the holiday to stimulate demand over the medium term. But with one eye on what could be a whopping £400 billion budget deficit this financial year, Rishi Sunak will be unlikely to oblige.

All things considered, 2020 was still a bumper year for the housing market, with the number of homeowners across the UK rising to 64.6 per cent – the third year in a row the figure has increased.

However, the rate of home ownership remains well below the 2003 peak of 70.9 per cent.

The North East has the lowest rate of home ownership in the UK outside London, at 63 per cent, while 15 per cent of the region’s people live in private rented accommodation and 22 per cent live in social housing.

The over 65s continue to have the highest rate of home ownership by age group (80 per cent), while there was also a slight uptick for those aged 55 to 64 and 35 to 44.

The rise in the home ownership rate for those aged 25 to 34 seen in the last couple of years held broadly steady at 41 per cent in 2020.

James Forrester, managing director of Barrows and Forrester, said: “It seems as though UK property market endured a slight case of house price vertigo during the start of 2021, with a marginal decline month-on-month following the six year high seen in December.

“However, a 6.4 per cent annual increase is nothing to be sniffed at, and given the wider context of the last year, is actually rather remarkable.

“Of course, we expect to see the wild ride spurred by the stamp duty holiday come to an end as we approach the deadline, and this cool in house price growth is likely to continue over the coming months.

“However, with the hopper still full to bursting with pending transactions, we are far from teetering on the cliff edge where market health is concerned and so any claims of a house price crash are, at best, greatly over-exaggerated.”