Are UK property prices at their peak?

01 October 2021

Now that tax reductions are tapering off, will the expected drop in demand mean prices will finally start to fall in the run up to Christmas?

What lies behind the sharp rise in house prices?

This year has seen a boom in UK property, with prices soaring and buyers snapping up properties the moment they come to market. This buying frenzy was hardly unforeseen, since buyers were spurred on by the temporary cut to stamp duty rates. But now that this tax break is tapering off, does this mean that prices could be heading for a downturn?

The latest Nationwide House Price Index shows how dramatic the spike in prices have been: although July saw a modest dip in prices, they were up 2.1% in August, the second largest month-on-month gain in 15 years, while annual house price growth rose to 11%. House prices are now around 13% higher than when the pandemic began.

While the stamp duty changes have grabbed the headlines in the rush to buy, there are other possible causes to the rise in property prices. According to Will Hobbs, Barclays Chief Investment Officer, “A key factor behind August’s price increase is likely the low availability of housing stock, as reports indicate many estate agents are struggling to increase the number of properties on their books.”

In its recent research, property valuation firm Zoopla highlights that UK property stock levels are down 26.4% in June compared to the 2020 average, while buyer demand remains up 20.5%. This combination of factors has further reduced an already limited stock supply, thereby putting pressure on prices.

Another pressure on the market has been the changes in our lifestyle and working practices brought on by a year of lockdowns and social restrictions. Liam Boardman, Wealth Mortgage Specialist at Barclays, said: “We’ve seen a major change in people’s relationship to work and home, and these changes will likely continue long after the pandemic has ended. The shift in how and where people want to live and work will continue to drive demand.”

But while record price rises and tax discounts will soon end, James Peto, Wealth Mortgage Team Leader, said, “The price gain may soften in the near term but the gap between supply and demand will continue to be a key driver of any price movement in 2022.”

While 2022 may not see a large price drop, prospective buyers can take some relief that not all regions saw record rises. According to Office of National Statistics data, northwest England saw the strongest annual rise in house prices, reaching 18.6%; London ranked lowest with an increase of 6.3%, marking seven consecutive months at the bottom of the list.

However, there are other possible factors to keep an eye on. James Peto said, “As government support schemes are scaled back, and if, as expected, unemployment rises along with potential tax increases, we could start to see a shift in demand. But there are no certainties, and with many variables at play, including the shift from office work to working from home gaining momentum, it’s not unforeseeable that we may see demand start accelerating again.”

In summary, Liam Boardman added: “Many factors will drive the shape of the property market through quarter four and into 2022. Whilst client demand remains high and borrowing continues to be close to records lows, we expect that momentum will continue in the short to mid-term.”

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