Sunday, August 23, 2020
A post-lockdown housing boom. But will it turn to bust?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

There are many things you might have expected to happen as lockdown was eased but I suspect that a housing boom was not one of them. At a time when it has been harder than expected to get people out of their homes, it was not obvious that the first thing on the minds of many would be moving to a new one.

That there has been a burst of housing activity and a jump in prices is not in doubt, and I shall come onto some of the evidence in a moment. It is possible, of course, that some of this has been stimulated by the experience of lockdown itself, and the prospect of permanent changes in working arrangements.

Who would not want to work from home in a thatched cottage in St Mary Mead, rather than slogging in on the 7.32 to Waterloo, followed by a sweaty Tube journey? Other cities will have their variations on this.

Some estate agents say this has been an important factor, though they are pretty good at talking their own book, and I doubt that it has been the key influence. Even in the strange world in which we are living, most house moves are local.

So what is driving a market that, according to the Nationwide building society saw prices rise by 1.7% last month, with the Halifax only fractionally behind at 1,6%, pushing prices to record levels and annual rates of house-price inflation higher?

The Royal Institution of Chartered Surveyors (RICS) suggested that the easing of lockdown – the housing market reopened three months ago – lifted buyer enquiries out of their post-referendum torpor. According to the RICS’ residential market survey, a net balance of 75% of surveyors (those reporting a rise rather than those reporting a fall) saw a rise in in new buyer enquiries last month.
Surveyors also had something to sell, with a net balance of 59% recording an increase in instructions to sell. In the past few weeks the market has come back to life with a bang.

The first and most obvious reason for the strength of the market in recent weeks has been the bunching effect from a combination of stalled pre-lockdown purchases and pent-up demand. Some of the activity that would normally have occurred in the period between late March and mid-May has instead happened since.

There has been a second factor, supported by traffic figures from Rightmove, the property portal, and its rivals. When Brits were at home, they did not just watch Netflix, bake bread and grow beards. Many scoured the property websites. To this can be added the fact that the normal housing market summer lull, as people disappear to foreign parts, has not really happened this year.

A third factor is, of course, that the chancellor, Rishi Sunak, could not rely on these natural forces to continue lifting the market, so in his summer economic update last month increased the stamp duty threshold in England to £500,000. Some other parts of the UK have lower thresholds, reflecting lower house prices. He was worried that the housebuilders were reluctant to start work on new sites and wanted to provide the additional boost to consumer spending that stronger housing market activity provides. When people move, they spend, on furniture, furnishings and other things.

There is, it seems, a definite stamp duty effect. Knight Frank, the estate agent, reported that the number of offers accepted in the UK market between July 8 and August 3, after the stamp duty announcement, was 146% above the five-year average for that period. Not all of that was the impact of the stamp duty cut, but much of it was.

There is, then, a mini-boom under way in the housing market, for prices and for activity. The question is whether it is just a bit of summer madness, which will fade like the flowers when the days get shorter.

There are two significant concerns. One is mortgage availability. Some lenders are making life tougher for first time buyers, as this newspaper has reported. Nationwide has led the way in tightening the rules on how much help young people can get from their parents, the legendary Bank of Mum and Dad.

Across the market as a whole, mortgage rates have gone up on high loan to value mortgages, in spite of the Bank of England cutting official interest rates to a record low of just 0.1%. Bank data shows that the average five-year fixed rate mortgage on a 95% loan to value advance rose from 3.28% at the end of February to 4.11% at the end of July.

Lenders are nervous, as are most other housing market observers, because of what is yet to come for the economy. A year in which most people experience falling real pay and in which unemployment is bound to soar in the autumn is a pretty toxic combination for the housing market. The shoe of widespread joblessness has yet to drop.

These concerns are justified, and it is quite possible that a combination of restricted mortgage availability and rising unemployment kills off this mini-boom and turns it into a bust. Those would be the circumstances in which predictions of significant house-price falls, which usually happen in recessions, would come to fruition.

There are, however, a couple of caveats. The surprise strength of the housing market at present may reflect the fact that people are buying blind, unaware of the horrors that are to come. Or it could show that housing is more resilient, more of a safe haven, than we think.

Life is unfair, and it may be that the shakeout in jobs that we are seeing is also unfair. In a piece on housing for ING, the bank, one of its economists James Smith, notes that the sectors with the highest levels of furloughed workers, who may be most vulnerable to unemployment, tend to be young and lower-paid. The typical first-time buyer is older these days, in their early 30s. Covid-19 may have made it harder for young people to get close to the housing ladder, without necessarily harming the prospects of those who were ready to buy.

At the other end of the age scale, early official evidence also points to a big fall in employment among the over-65s, who are beyond normal home-buying age. I am casting no aspersions here – I am no spring chicken myself – but it may be that some older workers have found it more difficult to adapt to working from home and are more reluctant that younger colleagues to return to the workplace, so have decided this is time to stop. A fall in employment among older workers does not have much of a housing market impact.

These are caveats, and may not be enough to offset the negative impact of a really big rise in unemployment. But, having thought that a significant fall in house prices was a Covid-19 certainty, I am no longer convinced. Whether that is right or wrong I shall report back.