You've all seen the headlines 'HOUSE PRICES ARE RISING' in a year when other sectors of the economy have suffered, why is it that the housing market has done so well, this was a question posed a few days ago to me on Facebook by a chef one of the industries that are suffering and it's a really great question, why do prices keep going up, how is this happening now? What forces are in play and are prices really taking off and/or relatively high?
(Prices have gone up) far too much, why do they keep going up it doesn't make sense?
Hi Paul, glad you asked there's a number of forces in play, mostly economic in nature -number one being the usual micro-economic suspect 'SUPPLY & DEMAND'. People are more focused than ever on their living space this year, being cooped up at home and with home becoming 'place of work' how important and in focus has your living space become? Demand for space, for extra room, a dedicated office space, a garden & generally nicer living quarters take front and center stage! This demand has materialised itself in 'PENT UP' demand as well, as at the beginning of the pandemic initial shock fear and uncertainty put the market on ice temporally, followed by the surge in demand as we all realised the pandemic isn't world ending.
Meanwhile supply of housing across the country has continued to diminish, a trend that was well established but which the pandemic made worse as building projects were put on hold initially and contractors had to stay at home, and investors became cautious. Only 610,000 new homes have been completed across the UK in the last five years, relative to nearly 800,000 in the preceding five, a drop of 23%. Mortgage companies have rolled out mortgage payment holidays throughout 2020, saving many home owners from being forced to sell -a section of the market which provides some natural supply in any normal year.
The story doesn't end here, on top of this pent up demand and diminishing supply we have macro-economic forces at work supporting the labour market and the housing market itself. Furlough schemes, universal credit and bounce back loans have supported wages and kept homebuyers in their jobs. Stamp Duty tax has been put on hold and interest rates on mortgages have been driven down to historically low levels. All the help to buy schemes are still available and 95% mortgages are back (last seen in the pre-credit crunch crisis heydays of easy mortgages).
This all means that money is cheap and is available to buy all helping to support demand and make it materially possible to purchase. Infact, I would argue that there has never been an easier and cheaper time to purchase from a cost of borrowing perspective making it not only a good time for home sellers but a good time for home buyers as well.
All that said you may think house prices are racing ahead with the government needlessly fueling the fire and pricing everyone out of the market? You may be surprised to hear that whilst 2020 has seen a particularly good appreciation in prices of 3.9% across the country (up from 1.3% rise in 2019), #property as an asset class is not the best performing asset out there, stocks shares & bonds still regularly outperform in many years over the last 20 years, with property on average producing just over 2% year on year return consistently -not exactly earth shattering returns! OK property as an investment is a lot more consistent, safe, certain, less volatile and requires significatly less knowledge and barrier to entry in order to do well than these other investment classes, plus most importantly you get the added benefit of living in your most valuable tax free asset which is difficult to put a value on how much that is really worth. If you would like to keep abreast of what's really happening in the property market you can follow me on twitter;
Darren McLaughlin. Real Estate Analyst.