The UK housing market has long been known for its vigour. Since July 2020, however, its performance has been astounding. According to figures from the Office for National Statistics, over the year to March 2021, there was a 10.2% increase in property prices. Is this, however, a good sign or a major red flag?
House prices in context
The ONS figures are for property as a whole rather than just residential property. Realistically, however, the bulk of transactions completed in that period will almost certainly have been for residential property. What’s more, if any commercial property was sold, it was highly unlikely to have been for any significant price. The only potential exception here is “staycation” property.
Additionally, March through June 2020 was essentially closed season for the housing market. This essentially means that the “year-on-year” increase was achieved in three-quarters of a year. It was also achieved during a pandemic and with Brexit ongoing. That’s little short of phenomenal. In fact, the last time the UK housing market saw higher growth was in August 2007.
The spectre of 2008
Of course, after 2007 came 2008. That was definitely another year most people would probably like to forget. In fact, the repercussions from that year continue to be felt today as the UK government still owns shares in RBS. This in itself leaves the UK government exposed to the housing market. Its exposure is increased through its various buyer-support schemes.
The Help to Buy Equity Loan scheme arguably carries the most risk. This is because the value of the government’s stake in a property is directly tied to its market value at the time the buyer pays back the loan. This means that the government is at risk on two fronts.
Firstly, it’s at risk of the buyer being unable to pay the mortgage. They would then either need to sell the property at the going market rate or have it repossessed. Secondly, a buyer could leverage the situation by buying themselves out of the loan at a discounted price. This would make perfect sense for them individually but not for taxpayers as a whole.
The new Help to Buy Mortgage Guarantee scheme also leaves taxpayers exposed to a downturn in the housing market. Technically, the guarantee is to the banks rather than to the buyers. Essentially, however, the end-effect is the same.
Will history repeat itself?
There is one factor about these price increases which has not applied before. That factor is, of course, the Stamp Duty holiday. This means that even though headline property prices have increased, the financial impact to the purchaser is less than it would have been in normal circumstances.
At least, it is if you’re an onward-mover or an investment buyer. First-time buyers already qualified for a discount on Stamp Duty. As has often been pointed out, they lost this advantage during the general Stamp Duty holiday. That said, they still qualified for other, unique tax breaks such as the Lifetime ISA and the Help-to-Buy Equity Loan scheme.
This means that the people who have bought property since March 2020 are not necessarily as financially-stretched as the headline figures might suggest. If they have bought their homes as long-term purchases and can afford their mortgage over the long term, then, statistically, there is unlikely to be a problem. Over the long term, general inflation will almost certainly do its work and deliver them equity.
On the other hand, if they need (or want) to move or have issues paying their mortgage, then they could find themselves in very serious trouble. If future buyers are unable or unwilling to pay these kinds of prices and Stamp Duty then recent buyers could very easily find themselves in negative equity. In short, the Stamp Duty holiday may be creating a new generation of mortgage prisoners.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage
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