7 July 2021

Guest Blog by Lucian Cook, Head of Residential Research at Savills

Out of the ordinary

The events of the past year turned the historical relationship between the economy and the housing market on its head. But what next? Lucian Cook, head of residential research at Savills, dusts off his crystal ball.

The performance of the UK housing market over the past 12 months has been anything but ordinary. For the first time in living memory, a recessionary period has been accompanied by a surge in housing market activity and double digit house price growth.

Three forces at work

This has been driven by a wholesale reassessment of homeowners’ housing needs, facilitated by the current ultra-low interest rate environment and exacerbated by a time-limited stamp duty holiday.

Consequently, the composition of the market has changed. Upsizers, many of whom had put their plans on hold after the Brexit vote, returned to the market in droves. Buyers rediscovered the appeal of country living. Search areas were widened in the so-called race for space and a property with a separate space to work from home and a decent sized garden became the holy grail.

Change in the air

But change is in the air. The bulk of the benefit of the stamp duty holiday has passed. Social distancing has been relaxed and life – although not yet back to normal, at least shows signs of being able to.

And so, it is only to be expected that the housing market will evolve. Some of the intensity appears to have come out of an admittedly pretty hot market already.

Indeed, if we look at the numbers coming out of the data provider TwentyCi, we can see that in the first five months of the year the number of agreed sales in the UK housing market as a whole were on average a thumping +85% above what we would consider normal. In June they remained above historical expectations, but to a much lesser degree at +13% above the 2017-2019 benchmark.

Back to normality

While some of that undoubtedly reflects a lack of stock available to buy, it also reflects somewhat less frenetic activity among potential buyers. That bodes well for a return to more normal market conditions over coming months.

Strong over £1m

But for now, the data from TwentyCi tells us that the market over £1m has become the strongest part of the market (whereas it was actually the upper to middle part of market where there was the most for buyers to gain from the stamp duty holiday).

Transactions above £1m remained +53% higher than we would normally expect in June; not perhaps at the heady heights of the early part of the year, but still robust.

And our recent client surveys indicate that there remains a core of unmet demand in the prime market from those looking to move over the remainder of the year. At the top end, that indicates a gradual – as opposed to an abrupt – restoration in the balance with supply.

The role of finance

More widely, the notion of a soft landing is supported by the prospect of a continued low interest rate environment. Further comfort can come from the high proportion of those buying (and remortgaging) who have locked into longer-term fixed rates, enabling them to effectively plan their household finances over the medium term.

This, combined with a strong rebound in the economy and an ongoing desire for more space given the prolonged impact which the pandemic has had on our day-to-day lives, is likely to underpin house prices even as the rate of annual house price growth slows.

The double-edged sword

Of course, this is not without its downsides.

High house prices mean a higher hurdle for first-time buyers unless there is suddenly more mortgage finance available on competitive terms for those with a small deposit.

The government’s mortgage guarantee is designed to deliver just this. But for the moment, high loan-to-value lending comes at an interest rate premium. That means equity – a key driver in the housing market over the past year – will continue to play an important part in the market for some time to come, whether for those looking to get their foot on the first rung of the ladder or those who have already climbed it.

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