The past 15 months have produced a bizarre economic paradox. In 2020, the economy shrank at the fastest rate recorded in modern times: 9.9 per cent. Yet house prices have not merely weathered the storm, they have risen at the fastest rate since the height of the property boom in the 2000s. According to Nationwide, the average value of a UK home has risen by 13.9 percent in the past 12 months. Halifax puts it a little more modestly at a 9.5 percent annual rise. Yet there is a pretty clear picture of a rising market driven by a lack of stock and a desperation from many people to move home before the stamp duty holiday finishes — as it does tomorrow.
How come? On the one hand we are witnessing the inevitable results of financial stimulus. The government and Bank of England have between them been doing all they can to buy an early exit from the Covid recession, not least through quantitative easing. The expansion in money supply has to end up somewhere and now, as after the 2008 crisis, it seems to be flooding primarily into asset prices rather than consumer prices (although the Consumer Prices Index is also rising).
It isn’t just the housing market. Stock markets, too, have been rising pretty well everywhere in spite of many companies reporting falling profits and damaged balance sheets following the crisis. It isn’t just monetary stimulus itself that drives prices upwards — the psychological effect is just as important if not more so. The constant bailing-out of markets sends investors a message: that investing has become almost a one-way bet. If prices rise, all well and good. If they start to fall, then governments and central banks can be relied upon to step in and so limit losses.
But there are other things going on in the property market. Lockdown has generated a huge demand for larger homes. Houses and flats that might have seemed large enough when the occupants went out to work every day start to feel miserably small when two people are trying to work from home and children are trying to do remote learning. Result: house goes on market and the search for an extra bedroom or two — and a proper garden — commences.
Moreover, the cladding and leasehold scandals have driven people away from flats and towards houses. A great number of homeowners have not been able to enjoy the rise in property values. If you live in one of the many blocks with Grenfell-style cladding you may find that the value of your home has, for the moment, fallen to virtually zero. But hardly any of these properties are actually being bought and sold and so the collapse in their value does not show up in house price indices, which are based on sales data.
Another factor in the current property boom is an absence of forced sellers. In most recessions, unemployment grows rapidly causing homeowners to sell up in distress. Yet with the Covid recession, many people who are out of work have been protected by the furlough scheme and have been able to carry on paying their mortgages. To add to this, relatively few people are now highly leveraged. Apart from buyers who took advantage of government incentives on new homes thanks to taxpayer-backed mortgages, it has been virtually impossible to obtain a high loan-to-value mortgage in recent years. Many people who in previous recessions would have been young homeowners are now renting instead.
The question is, can the boom continue now that the stamp duty holiday is ending? Common sense suggests that it ought to take some of the panic out of the market: there is no longer any deadline to meet. But housing booms in recent times have proved far more durable than anyone expects. If prices did start to fall, it would almost certainly be followed by another government wheeze to try to prop up the market. In other words, don’t expect a collapse.