Are we in a property bubble?

Due to a build-up in demand and the stamp duty holiday, the housing market is thriving. Properties are going for over asking price, and by a considerable amount in some cases. And, as the stamp duty holiday deadline passes, it’s got many wondering if we are in a property bubble that’s about to burst?

House prices reached an all-time high, and the accelerating property market shows no signs of slowing down. Here, we’ll look at some of the recent market trends and weigh up both sides of the property bubble debate.

What is the property bubble?

Amongst all the financial chaos caused by the global pandemic, the UK housing market continued to rise. The average house price increased by more than 10% in a year to March 2021, and it’s now £24,000 more expensive to buy somewhere than it was at the start of the pandemic.

House prices have been consistently rising month on month since July 2020, with the average UK house price reaching a record high of £261,743 in May 2021. We last saw increases like this before the financial crisis in 2008-9, so it’s understandable why there are fears of another property bubble about to burst.

To understand more about what’s bubbling up under the surface of the property market, let’s look at the reasons behind the recent hike in prices.

Influences on the rise in house prices

Stamp Duty Land Tax

The most obvious influence on the property bubble is the temporary stamp duty holiday. After the housing market closed in March 2020, Chancellor Rishi Sunak introduced the tax holiday to boost the economy.

Stamp Duty Land Tax (SDLT) is tax paid if you buy a property or land over the nil-rate threshold.

The nil-rate band for SDLT temporarily increased, and it meant no stamp duty was payable on the first £500,000 (in England and Northern Ireland) until the end of June 2021.

The nil-rate band decreased to £250,000 from 1 July 2021, reducing further to £125,000 on 1 October 2021.

Saving more

Over the recent lockdowns, unable to go out, people have found themselves saving more. Meaning that the house deposit fund built up quicker than first expected, bringing forward many property purchases.

Working from home

35.9% of the employed population did at least some work at home during 2020, turning the way we work on its head. And as more companies are turning to work from home as a more permanent fixture, people now have greater freedom to live further out in the country, and many city workers are changing their way of life.

The pandemic also increased our time at home, leading many to reevaluate their need for space, specifically outdoors.

Data collected from the ONS highlighted this, as the average house prices increased more in rural areas from March 2020, London seeing the lowest rise, and detached houses saw higher price growth than flats and maisonettes.

Cheaper and easier to borrow

Since March 2021, the Bank of England base rate has been at 0.1%, which means the cheapest borrowing seen in a long time. And, with the government-backed 95% mortgage scheme introduced in April 2021, borrowing has become even more accessible.

Although, lenders remain more cautious than they were back in 2007, with more robust affordability checks.

Supply & demand

There has been an imbalance between how many homes are on the market and the demand from buyers. These trends are unsurprising, although it does show that a desire to move outweighs any uncertainty around financial security for the buyers.

UK house prices have defied all economic odds seeing significant increases whilst GDP fell by 10%, the largest fall in 300 years.

However, the question is, how long will this property bubble last? With the stamp duty holiday coming to an end this month, many buyers are rushing to complete their transactions, and others are putting plans on hold to see how the market will fare in the coming months.

The pessimists amongst us fear that as the stamp duty holiday ends the property bubble will puncture. And with the possibility of increasing inflation and interest rates rising, it is starting to feel like previous credit crunches.

However, on the other hand, some experts argue that the property market boom is driven by the pandemic and not systematic issues. Homeowners have different desires now for more space and a better home environment. That coupled with the build-up of savings means getting on the property ladder or buying a bigger home has become more achievable.

Of course, there’s also the fact that demand still outweighs supply, for the moment. And experts don’t expect this to die down as the stamp duty holiday tapers. Zoopla analysis shows that the house market demand has been driven by growing families and the older generation with equity in their house. And with little to no mortgage to pay off, an increase in stamp duty is neither here nor there.

Trying to time the market when you are buying a home is a stress you don’t need. First, you need to find a house that suits your needs, and then you need to make sure you can afford it; now and if things were to change in the future, such as if interest rates rise.

As we’ve found over the last year, we can’t predict the future, so don’t try to second guess house prices. It’s all about having a plan and making sure it’s robust enough to weather any storm.

If you have any questions or want to discuss your financial plan, please get in touch and speak to one of our independent financial planners.