Saturday, December 11, 2021
As gloom descends, can house prices continue to defy gravity?
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. Not to be reproduced without permission.

Things have moved quite quickly, and the jolt of uncertainty I described last week has increased in intensity. Suddenly, the run-up to this Christmas seems as uncertain as last, if not more, and the country appears rudderless.

New restrictions will have a more discernible impact on the economy and will combine with the changes in behaviour I described last week. It will be surprising if there is not a fall in gross domestic product this month, and a weaker fourth quarter than previously expected.

Rishi Sunak, who spoke out against the new “Plan B” restrictions in cabinet, is concerned not just about the potential economic cost but because there will be pressure to bring back some of the Covid support that he thought he had seen the back of.

The pound, which some analysts had down for a strong 2021 revival, has been suffering. It has been weaker than now in recent years but is now back below the levels it slumped to immediately after the Brexit referendum in June 2016. The vaccine rollout is still going pretty well, but sterling’s vaccination boost has faded fast.

Markets still expect the Bank of England to raise interest rates in time but would be very surprised if it were to happen this week, which at one time was regarded as a near certainty. The decision on rates at one time appeared heavily dependent on what happened to the job market after the end of the furlough scheme. Now there are a wider range of economic considerations.

One interesting question is how this will affect the housing market. Its story has been an extraordinary episode in an extraordinary period. It has boomed even as other parts of the economy have been on their knees. When the 2020 slump loomed with the first lockdown in March 2020, during which the housing market was temporarily closed, a plunge in house prices and activity might have been expected.

In fact, any effect, which was minor, was temporary. Soon, people were using their spare screen time to hunt for houses on the property portals. Helped by record low interest rates and the chancellor’s stamp duty cut, prices and activity were soon surging.

It continues. The official house price index from the Office for National Statistics has house-price inflation at 11.8 per cent. The average UK house price has risen by £28,000 to £270,000 over 12 months.

The Halifax house price index showed that prices in the latest three months, September-November, were up by 3.4 per cent, the strongest quarterly rise since 2006, the eve of the financial crisis. This was significant, in that prices continued to rise even after the stamp duty reduction came to an end on September 30. It suggested that the market, or at least house prices, had enough momentum to see it through the removal of the tax incentive.

One reason for that was provided by the latest survey from the Royal Institution of Chartered Surveyors (RICS), in its latest residential market survey. The great obsession in housing commentary is with new-build supply, and it matters. Even more important as far as the day-to-day market is concerned, however, is the number of existing homes becoming available for sale.

According to RICS, the number of new instructions to sell has fallen fro eight months in a row, even as buyer demand continues to increase. This can only have one outcome. As RICS puts it: “This constrained supply backdrop is also underpinning price growth, which has shown no sign of easing over the latest survey period.”

When does the housing market succumb to gravity? The economic news is downbeat and consumer confidence has weakened. That, however, was also the case when the market started booming last year. One of the new restrictions is that the advice on working from home where possible, effective from tomorrow, has returned. This was one of the factors that encouraged people to focus on housing, and to seek properties further away from their workplaces with gardens and nearby countryside.

The new working from home advice will make anybody who did this even more comfortable in their choices. It will reinforce this aspect of housing demand. Even when things settle down, a hybrid model of working, part-home, part-office, will become the norm for many people.

There is another change which, if it occurs, will have a positive impact on the housing market, albeit a marginal one. The Bank will publish its financial stability report tomorrow, though the accompanying press conference has just been switched online because of new official guidance. It has been widely speculated that the Bank will relax the mortgage affordability rules introduced seven years ago, which have had the effect of making life tougher for first-time buyers. High house prices are the biggest barrier, of course, for first-time buyers.

Sooner or later, the steam will come out of the housing market. Transactions fell after the end of the stamp duty holiday even if prices remain strong, and activity will be softer in 2022 than this year. Supply shortages push up prices but they also reduce the volume of sales.

We should always remember in all this that while soaring house prices are often reported as good news, particularly by certain newspapers, this not necessarily true. Not only do they make life difficult for new buyers but they dramatically widen the country’s wealth divide.

A report by the Resolution Foundation, ‘Home County’, in conjunction with the Financial Fairness Trust looked at the house price gains of the past 20 years, which add up to an astonishing £3 trillion (£3,000 billion) addition to wealth and examined how they were distributed. The answer was very unevenly.
The average property wealth gain for the richest 10 per cent over this period was £174,000 per adult, compared with less than £1,000 for the poorest third of the population. Average wealth property gains in London were three and a half times those in the northeast.

Property wealth thus reinforces the regional divide and is cumulative in its effects. The children of those in London and the southeast benefit most from inherited property wealth, while those in many other regions barely do so. The government’s proposed social care reforms will lock in these wealth inequalities, with people in areas with lower prices more likely to have to sell up to fund their care.
What to do about it? The Resolution Foundation suggests that a 28 per cent capital gains tax on main residences could bring in a useful £11 billion a year. A smaller £4 billion a year could be raised with a threshold of £75,000.

This is not the first such suggestion. Dame Kate Barker, the former member of the Bank’s monetary policy committee and expert adviser to the last Labour government on housing supply, also recommended capital gains tax on main residences. I doubt, however, that even this high-taxing government would dare to go there.

In the meantime, we await signs that house price inflation is coming back to earth. Like inflation in general, it may have further to tun.