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Changes expected to occur in the UK house market

Changes expected to occur in the UK house market

The UK housing market is not fairing too well. Consequences of the Pandemic may be surfacing.  With increased demand after lockdowns, low interest rates, temporary cuts in tax, government help for workers and those with mortgages, we may be seeing a push back.

Prices continue to grow

In spite of the severe economic slowdown caused by the pandemic, house prices in the UK increased dramatically in September as reported by Nationwide, a leading mortgage company. A surprising response in light of increased unemployment, the corona induced economic decline and fears of a second wave plus of course the economic consequences and recovery needed following Brexit.  

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According to Hansen Lu, a property economist at Capital Economics “Confidence in the housing market has been unexpectedly strong. We’re seeing a V-shaped recovery.”  However, it appears that this ‘recovery’ is being driven by a few wealthy buyers who already have a portfolio of properties.   This begs the question. How long will the boom last if the economic situation gets worse”.   

At the moment, and according to Neal Hudson, of Residential Analysts, a housing market research company, it seems that those most badly affected by the economic effects of the pandemic are young people with low incomes who were unable to buy homes prior to the economic turndown.

Surprisingly the people who are purchasing now may be finding themselves in a better financial situation than before the pandemic.   Owing to the fact that their summer vacations abroad were cancelled and everything was closed during lockdown, plus the tax cuts that were introduced and will continue until March next year, they now find themselves in a better financial position.  There has been a rise in those seeking more expensive properties which has pushed prices up further.

It was reported by TwentyCi, a housing market data provider, that houses being bought costing over £1 million in August of this year was more than double that of the same period last year and that this followed big increases in June and July.

Those better off individuals and families are moving further away from the cities.  Finding larger homes with gardens in the belief that they will not need to travel into the cities in order to work after the corona virus is under control. 

For instance, according to Rightmore, property platform, there was a large increase in the first half of this year in sales of homes in, around 16 villages, within easy reach of London.  In fact, these sales outdid those for the whole of 2019. So many people want to move to the country, the city has lost its benefits.

According to Richard Donnell, the research director for Zoopla, the present situation has caused a “once in a lifetime reevaluation of what a home means to people” to occur. “Lockdowns brought people into the market who weren’t planning on moving”.  

Donnell goes on to say that “Demand from existing homeowners is 53% higher than it was at this time last year, while growth in the number of first-time buyers could stall for the first time in a decade as banks take a more cautious approach to lending in the face of the economic downturn.”

It is possible to track the activity of the housing market by looking at transaction data. In August, the tax authority reported that the transactions for residential properties were below a quarter of the number for the same period the year before.  According to Neal Hudson, “To end up with a period where you have rising prices, you might only need 10,000 or 20,000 new buyers in a month”.   He also suggests that prices could be pushed down if not many forced sales were to take place.

The present situation is still very unstable. The government is soon planning to reduce the amount of financial support for worker’s wages and there is the possibility of new restrictions being introduced which will likely have an adverse effect on jobs and the economy in general.

Hansen Lu believes “The longer the pandemic goes on and the longer the economy isn’t able to return to normality, the greater the risk that house prices will see a major downturn.   Prices have been steadily growing since the 2007/2008 international financial crisis so this will be the first significant fall since then. 

The impending correction or not? 

According to The Centre for Economic and Business Research located in London, it is predicted that UK house prices will see an approximate 10% drop next year.   A few weeks ago this figure was 14% so that is an improvement which is due to the “sustained strength in the market” says senior economist, Pablo Shah.  

The median price for a house, just a month ago was £226,129, which, according to Nationwide is a 5% increase on the same time last year.   The Centre for Economic and Business Research’s prediction allows for the support given by the government for workers’ salaries and help to prevent job losses.  Shah goes on to say “The job support program and mortgage repayment holidays have. to a large degree, insulated households from the economic turmoil thus far.”

The UK Finance, a bank association, reported that in June the number of mortgage deferrals had reached 1.8 million but by August this figure had gone down to around 731,000.   It is still possible for those with mortgages to apply for a first or second, three- month freeze until the end of October.   This will make it easier for those having difficulty making payments until the New Year.  

However, even if people do find themselves in arrears, it is expected that banks will be more sympathetic in their approach.  The banks are doing comparatively well; because of low interest rates it is easier to repay and new mortgage restrictions make it more difficult for people to borrow more than they are able to manage.  

According to Eric Leenders, head of personal finance at UK Finance, “Lenders understand that many households will continue to see their finances squeezed as the pandemic continues and will be offering a range of support for those who need it.”

Neal Hudson says “Politically there will be a lot of pressure on lenders to avoid repossessions and a house price collapse is not good for them”.   Reducing the number of repossessions and forced sales will help to maintain house prices.  

Nevertheless, with the expiration of the cut in house purchase taxes set for March, it is likely that house transactions will decrease quite significantly.  He goes on to say that “if job losses become more widespread, downward pressure on incomes could translate into a much bigger pressure on house prices.”

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