House prices peak but beware the slide of March

The post-Covid property frenzy has taken the market by surprise but experts fear the hangover is just months away

House sliding on a scales with a graph

Andrew Groocock, a partner at property agent Knight Frank, reels off the evidence of Britain’s unlikely housing boom with disbelief in his voice. People are queuing up to buy houses. For the past 14 weeks, applicants have been 50pc above the agent’s five year average.

“It’s remarkable,” he says. “We were expecting there to be a surge of inquiries. But if I’m honest, that has basically carried on through literally from the moment we reopened up until now, and it’s still continuing.”

When the industry shut its doors in March for the pandemic and the threat of mass unemployment abounded, many feared the worst for the property market. Yet the latest Nationwide figures put average prices 5.8pc ahead of 2019 in October – more than £12,000 in cash terms.

Chancellor Rishi Sunak’s temporary stamp duty holiday on purchases up to £500,000 has dangled savings of up to £15,000 to would-be buyers until next April, while Covid-19 and months of lockdown have spurred a surge in demand for space and gardens.

The rush is such that lenders and the estate agency world are struggling to keep up with the sheer number of mortgage applications and transactions to process. Property website Rightmove estimates there are 650,000 sales currently in motion, 67pc above this time last year.

But what goes up is likely to come down. Even as hopes of a return to normality are raised by the emergence of a vaccine, market watchers warn that this year’s gains may be transitory as headwinds emerge throughout a difficult looking 2021.

The end of March brings a triple whammy: the end of the furlough scheme and with it the prospect of rising unemployment, the end of the stamp duty cut, and the onset of a much less generous version of the Help To Buy scheme.

The signs of increasing nerves are showing in the latest agent sentiment index from the Royal Institution of Chartered Surveyors, which indicated pessimists outweighing optimists by a margin of 27 percentage points over the condition of the market in 12 months’ time.

Simon Rubinsohn, the organisation’s chief economist, says that on sales, the surveys are signalling “that activity almost certainly will slip back, [but] it is hard to know how far at this point”.

He argues that actual prices will be more insulated due to the willingness of better capitalised lenders to show forbearance on mortgages, record low interest rates of just 0.1pc which are unlikely to budge, and the absence of forced sellers.

Compared with 2009 when more than 44,000 homes were repossessed, in 2019 just 5,400 were seized as ultra-low borrowing costs and unemployment close to record lows helped more people hang on to their homes.

In Rubinsohn’s view the missing ingredient for a price collapse – so far at least – is distressed sales. “Even with unemployment edging up further I can see why our members are saying that they won’t see any big change in prices,” he adds.

Others are more pessimistic. Andrew Wishart, a property economist at Capital Economics, is braced for a 5pc fall in prices next year as the Covid surge peters out and takes prices back to the levels seen in early 2019.

The extensive Government support – ranging from the extended furlough to a ban on repossessions – has buffered incomes despite a massive fall in output due to the furlough, keeping the property market in a pre-pandemic “Wile E Coyote” moment waiting for the fall. Unemployment remains at an artificially low 4.8pc.

Wishart says: “All the normal channels that would affect the housing market are being completely mitigated. It’s amazing really – people have almost ‘moved on’ from the crisis before we’ve actually seen the employment impact, because there’s still 7-8pc of people in employment on the furlough scheme and it’s questionable whether they’ll return to work. We expect a quarter of them to lose their jobs.

“Against that backdrop it’s really quite crazy that feelings of job insecurity haven’t had a bigger impact but I suppose it’s probably not the same people who are on the furlough scheme that are trading up.” Housing inequality has “only grown” as a result of the pandemic as the wealthier homeworkers trade up – and push up prices – while the lower paid are forced to pay for dearer low deposit mortgages, the economist adds.

A reined-in Help to Buy scheme set up almost eight years ago by George Osborne, the former chancellor, in the wake of the last financial crisis will take more wind out of the market’s sales.

From April the scheme, under which 52,207 new-build homes were sold last year, will be limited to first time buyers, cutting out over 9,000 second steppers. The scheme will also be subject to a series of price caps reflecting regional differences in the property market.

Dermot O’Leary, chief economist at investment bank Goodbody, estimates that some 20,000 new build homes could be squeezed out of the scheme by the new restrictions at the same time as Sunak brings down the curtain on the stamp duty cut.

“In hindsight the stamp duty holiday decision was probably the wrong one. The temporary reduction has had a major effect. It is just causing this pulling forward of demand. In the short term that will probably continue, but then comes the hangover,” he warns.

Jon Di-Stefano, chief executive of developer Telford Homes – now solely focused on the build to rent market – agrees. The industry veteran says: “The banks are going to be worried about unemployment and less likely to give people mortgages where they need them.

“You are going to see more challenges if unemployment goes up and the end of furlough scheme comes in, and you can’t use Help to Buy.”

Even with the arrival of a vaccine, the difficulties remain, he warns. “From a confidence point of view… If by that time everybody has been made redundant and those businesses are struggling to pick back up it is going to take a while before the market realigns itself to the end of Covid.”

For the housing market, the aftermath could be more painful than the pandemic itself.

Read more: How will coronavirus affect house prices