U.K. Housing Market: What is going on?

Last week’s headlines were heavily dominated by the lengthy U.S. election battle, but the U.K. housing market has been making waves in the news over the last few days. This is because, in the month of October 2020, U.K. house prices rose at the fastest annual rate in four years. In this short article, we’ll be taking a look at what is currently going on in the domestic housing market and why it seems to be performing well. We’ll also consider some potential investment opportunities, and whether we could be heading for another housing market slump.

Housing market overview

The housing market is essential, and while it is mostly stable, property prices can fluctuate. The key idea to housing is that supply and demand influence and drive the market – just like any market. Therefore, if more people want to move, or there are fewer houses available, buyers will be willing to pay more. On the flip side, houses lose value, often dramatically, when there is less activity and demand in the market.

Maintaining a stable housing market is not only essential in ensuring houses can actually be purchased, but a steady market ensures that other businesses can continue to function - businesses such as furniture stores, removal companies, electricians and so on. Currently performing strongly relative to the weak U.K. economy, the housing market seems to be in its own lane, but why?

Average U.K property price Source: U.K Land Registry

Current situation

A strong economy usually contributes to a strong housing market, as people generally have more money thus are more willing to invest in, and buy, real estate. However, with a double dip recession looming, unemployment soaring and the coronavirus still in full swing, why are U.K. house prices hitting all-time highs? There are a few key reasons:

Supply and demand

Being coined as the race for space, we are seeing more people re-evaluating their real estate desires due to the novel coronavirus. Working from home, despite for some being challenging, is proving ever-more effective, and being able to work anywhere is encouraging a shift away from small, city-based property to rural locations with more outdoor space. This increased demand is boosting property value, and helping further the housing market, particularly outside of London.

No stamp duty

Put simply, stamp duty is a tax a buyer must pay when purchasing land or some form of property in the U.K. However, as of July this year, British Chancellor Rishi Sunak confirmed there will be no stamp duty on properties worth up to £500,000 until 31 March 2021.

Money saved in the absence of stamp duty Source: The Guardian

This decision from the government is incentivising people to move, given there is a considerable amount of money to be saved. The suspension of the stamp duty also allows people to move more quickly and by saving a good chunk of money, movers may be encouraged to spend a little more on their property, or on consumer purchases in general, which in turn helps the overall economy.

Low interest rates

A well-known trend is that low interest rates generate a rise in house prices. We are currently experiencing historically low interest rates, with the Bank of England base rate sitting at just 0.1 per cent - there are even talks of introducing negative interest rates.

Interest rates from 2006-2020 Source: Bank of England

While this base rate is doing no wonders for savings accounts, in having such low interest rates, movers are more inclined to use variable rate mortgages to take advantage of such a low interest rate. This also means that buyers are often more inclined to take on more debt and spend more on real estate, in turn contributing to the growth of the housing market.

Real estate is still operating

Despite going into another lockdown, the fact that real estate agents and construction sites can still continue to operate means that there is a way of supplying the housing demand. By keeping all practices open, combined with the aforementioned reasons, there is nothing limiting people who wish to move.

Another Crash?

What happened last time?

You’ve all probably seen Adam McKay’s The Big Short, and if you haven’t it’s a must see (you can check out our review here). It gives a well-explained overall idea of what happened in 2007/08, and how a global housing market crisis was triggered.

But for those who aren’t aware, the housing crash was mainly the result of risky lending and subprime mortgages. Essentially, those who had lower FICO scores were offered subprime mortgages which had terms such as higher interest rates. The situation spiralled, with more and more people being accepted for such mortgages which led to house prices skyrocketing until the bubble finally popped. Eventually, people with this package couldn’t afford their payments due to such high interest rates - house prices decreased, and the debts owners owed were more than the house was worth. Millions across the world lost their homes and firms faced catastrophic liquidity crises due to default payments.

Why are people worried?

In mentioning the 2008 crisis, it is not to say we are definitely heading towards a housing collapse of the same magnitude. However, analysts are currently drawing parallels with what is going on today and the events leading up to 2007/08. While there is a whole avenue of potential concerns to explore, one in particular is the current precarity of the job market.

Due to Covid-19, there is a fear that people may start to default on their mortgage payments, as they may not have a stable line of employment in the near future. A study carried out by the Joseph Rowntree Foundation revealed that 1.6 million households (one fifth of all British mortgage-holders) were concerned about paying their mortgage over the next three months, and as shown above, a mass default on mortgage payments only negatively impacts the market as a whole. While the government has offered a helping hand in extending the furlough scheme until March and mortgage holidays for another six months, we cannot be sure how long the virus and such governmental stimulus will last. With 2.5 million people already having made use of the mortgage holiday so far, will they be able to resume making payments on-time next summer?

Furthermore, a demand for housing may quickly cut off should the government stop incentivising real estate purchases. Despite banks reportedly being more selective when approving mortgages, seeing similar patterns to 2007/08 is naturally a red flag to many. A combination of reintroducing stamp duty, an eventual increase in interest rates, and an unstable job market could all lead to the housing market taking a substantial hit.

Potential Investment Opportunities

As always, it’s essential to look for potential investment opportunities wherever possible. As we head into yet another lock down, where numerous businesses will suffer further, the fact that construction sites and estate agents can still operate may see investors turn towards real estate. With the housing market also experiencing huge demand, combined with governmental incentives, stocks in this sector may be an interesting area to research.

Here are just a few companies in the real estate sphere that have performed interestingly over the last week following the government’s announcements regarding stamp duty and lockdown not impacting estate agents nor construction.

Rightmove is almost back up to where it was performing pre-Covid-19 after leaping over 40 points last week.

Redrow PLC saw a strong rally last week. Yahoo finance also placed Redrow on their watch list, due to the fact its order book is up 39 per cent on last year, with further financials set to be released today (Monday 9 November) at the U.K AGM.

As for Kier, a big player in the construction sector, this may be a good chance to hop on this stock. Currently trading at just £46.00 compared to £149.50 in February, could we see an upward trend as we go into next year when the coronavirus situation will hopefully have improved?

Naturally, before diving into investing, be sure to research each company carefully.

Closing Remarks

With the 2008 crisis still not that far behind us, seeing housing thrive during economic downturn is naturally a worry for many, and with the uncertainty of the coronavirus, it is significantly harder to envisage how the market will develop in the coming months.

Whether the situation of 2008 will replicate itself again, we can’t be sure, but there is clearly a lot of noise surrounding another housing crisis. We are now in a new lockdown and a vaccine is still not ready, will people continue to relocate and further boost the housing market? Or, when the virus passes, will working from home die out, leading to less people relocating, and the market taking a hit? Let us know your thoughts in the comments!


The Student Investor is not a registered investment, legal or tax advisor or broker/dealer. All opinions expressed by The Student Investor are from the personal research of the author, and are written for educational purposes only. Although best efforts are made to ensure that all information is accurate and up-to-date, occasionally unintended errors and misprints may occur. Please note that the value of your investment can go up or down, and The Student Investor takes no responsibility for any decisions made by readers.

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