Why the housing market has been pedal to the metal during the pandemic.

The UK housing market has defied expectations throughout the pandemic, as both demand and prices have rocketed in a period where the UK is meant to be suffering from an economic shock caused by covid-19.

UK house price growth reached 10.2% as of March 2020, the government’s Office for National Statistics data shows, which is the highest rate seen since 2007.

There were 190,980 transactions in March 2021, double (102.3%) the amount in March 2020 and 32.2% higher than February 2021, before covid-19 took hold in the UK.

Stamp duty holiday

When the stamp duty holiday was introduced in July 2020 it was designed to keep house prices and activity afloat during these difficult times, but it’s arguably had too much of an impact.

The tax relief has seen buyers pay no stamp duty on purchases up to £500,000 compared to the usual level of £125,000 – saving owner occupiers and investors as much as £15,000 on tax.

Originally the stamp duty holiday was scheduled to expire at the end of March, which saw buyers clamour to complete purchases before that deadline.

However that date was pushed back to June 30th, attracting a fresh scramble of buyers looking to take advantage of the tax cut.

The stamp duty holiday has clearly stoked demand, as price rises since the tax cut was introduced have generally wiped out the value of tax savings people have been able to make.

Demand doesn’t seem to be letting up.

Research from The Deposit Protection Service revealed that a third (34%) of landlords purchased another buy-to-let property or intend to buy one within the next nine months – with a third (34%) citing stamp duty savings as a significant factor.

Lack of supply

Rising demand wouldn’t be pushing up prices like this if it wasn’t for the lack of new supply entering the market.

In the year to December 2020 housing starts dropped by 17% according to provisional government figures, while RICS reported that there was a lack of new property coming to the market in April.

Firstly it’s been a difficult time for builders, who were forced to pause work as the UK grappled with the unknown quantity of the covid-19 pandemic.

Developers are now back to work, but are likely slowed down by having to comply with safety measures designed to hinder the spread of the virus, which could limit the release of new stock.

Secondly some sellers are reluctant to sell their properties in the current climate, especially those more at risk from the virus.

Jeremy Leaf, north London estate agent and a former RICS residential chairman, at least predicts this issue to improve in the coming months.

He said: “We are finding that acceleration of the rollout of the second jab in particular is encouraging many older owners to put properties on the market but not fast enough to restrain prices.”

Regional growth

When we talk about the market seeing very strong growth, we’re generally excluding London.

Prices have risen considerably in the North of England in particular, with Yorkshire and the Humber (14%), the North East (13.7%) and the North West (12.8%) leading the way.

Places like London however have been hit by people leaving the big cities – with people working remotely and others losing their jobs there’s less of a need to live there.

As a result house price growth in London is at a more sensible 3.7%.

Secondly having to self-isolate has resulted in homeowners changing their priorities, resulting in more demand for green space and larger homes.

Given how expensive finding either in the likes of London is, it makes sense for people to upsize in less populated and more affordable regions of the UK, as second and third-steppers in particular have taken advantage of the stamp duty relief – many of them moving locally.

Pent up demand

During the pandemic people have been placed in limbo, not feeling like they can move and get on with their lives.

With this in mind, there may have been a surge in demand, prices and transactions even without the impact of the stamp duty holiday.

At the same time, those people that were lucky enough to keep their jobs during the pandemic are more likely to have saved cash during the period, because they were unable to spend money on the likes of overseas holidays owing to the travel restrictions in place.

Conclusion

A tax cut, a lack of new homes hitting the market and pent-up demand has seen house price growth hit levels not seen since 2007.

The current situation calls for caution from buyers, who need to make sure they’re not overpaying for properties in the current climate just because they’re competing with other aspiring owners.

In July the expiring stamp duty holiday will mean no tax is paid on the first £250,000 of property prices, down from £500,000, while that amount will be reduced again to £125,000 by the start of October.

Once these deadlines pass it seems likely demand will dampen, which could have a softening impact on prices.

After that time buyers may be able to drive a harder bargain, especially if more people feel safe enough to put their properties on the market.

So even if you can’t make a tax saving from the stamp duty relief, there’s not necessarily a huge rush to buy immediately.