Why are house prices still rising?

Back when COVID19 was still in full force, the UK government instigated a Stamp Duty holiday. This prompted a buying frenzy and, unsurprisingly, house prices rose. Since then, the pace of house-price growth has slowed. Overall, however, property prices are still rising. Why is this and what does it mean?

The forces driving high prices in the housing market

The two main forces driving house-price growth and inflation and lack of supply.

The impact of inflation

Probably the most obvious explanation for continued house-price growth is the impact of inflation. Inflation is, literally, the rate at which prices increase. Right now, it’s particularly high. The direct impact of high inflation is the fact that a high tide floats all boats. The indirect impact of it is that it encourages people to buy now in case they can’t afford to later.

This indirect impact is likely to be particularly strong in the housing market. There are two main reasons for this. Firstly, owning a property is a widespread ambition in the UK. Secondly, in the UK, property purchases are often financed by mortgages. That means buyers have to pay interest on what they borrow.

Interest rates have been trending upwards in the UK. This puts buyers under a certain level of pressure to lock in a fixed-rate deal now. If they don’t, they could find themselves trying to buy property when both house prices and interest rates are high.

The mechanics of supply and demand

In addition to the overall shortage of housing stock, there are more subtle issues with the supply of housing. For example, some of the UK’s properties are in places where it is challenging to find work nearby. The trend toward remote-/hybrid working may address this to some extent. It is, however, debatable how soon this will be.

The key point to remember here is that most remote-/hybrid roles depend on a solid internet connection. Even today, in some places, the UK’s digital infrastructure needs significant improvement.

Similarly, on-site work usually depends on transport infrastructure. Again, the extent and quality of this are highly variable throughout the UK. In principle, using personal vehicles can go some way to addressing this. In practice, that leaves the problem of finding parking when you reach your destination.

Even when housing is in a viable location, there may be limits on its practical usefulness. For example, a lot of the UK’s housing stock was built long before accessibility became a consideration. Some of these can be adapted but many cannot.

Energy efficiency is also an issue. Again, this is largely due to the average age of properties in the UK. As with accessibility, sometimes these issues can be addressed but often there is a limit to what can be done. What’s more, when improvements are possible, they are often expensive. Obviously, this is a disincentive to potential buyers.

What does this mean for buyers and sellers?

Buyers should be very careful to avoid overstretching themselves. It is hugely unlikely that the UK property market will crash. It is, however, very likely that it will end up running out of steam at some point. When it does, buyers who can keep paying their mortgages can just sit back and let time do its work. Those who can’t, however, may find themselves forced to sell at a loss or even to deal with foreclosure.

Sellers should make sure that buyers are actually capable of making good on an offer before they accept it. Remember that sales are only secure once they are complete. Even after contracts have been exchanged it’s still possible for buyers to pull out. They may prefer to swallow a relatively small loss than to risk a larger one.

For mortgage advice, please get in touch.

Your property may be repossessed if you do not keep up repayments on your mortgage.