Why the market has boomed and why it will slow down

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There is certainly strong demand in the housing sector, evidenced by Knight Frank reporting that in June there were 11.4 buyers for each new property, compared with 7.5 in June 2019.

There are multiple reasons for this, including;

  • low-interest rates
  • the desire for more living and outdoor space
  • quantitative easing
  • good rental income streams
  • the attraction of second homes
  • swollen bank accounts as people spend less on travel and entertainment
  • housing being seen as a safe haven, and of course,
  • the stamp duty holiday.

It is quite a long list. However, there are already signs that price growth is slowing, and a recent Royal Institution of Chartered Surveyors survey highlighted an expectation of falling demand and sales.

One factor supporting that expectation is the end of the stamp duty holiday in October. The holiday brought forward a number of transactions which should result in a period of ‘catch up’ when it has ended.

Affordability issues will also hold the market back as wage growth has lagged behind house price growth.

Other factors include the possibility of the Bank of England increasing interest rates and reversing its approach to quantitative easing.

In the market’s favour is that employment is recovering as the pandemic recedes, mortgages are likely to remain available and an increase in interest rates is unlikely to be excessive.

Additionally, and perhaps surprisingly in the light of the pandemic, consumer confidence is relatively high, and the appeal of more living space is set to grow.

Some analysts and ‘experts’ feel that price growth will slow in the year ahead. Others think it will stall and that capital growth over the medium term will be less than that experienced in the recent past.

The good news is that most believe that the chances of a major correction are minimal.

More good news is that they also believe the rental market should continue to perform well. The ongoing housing shortage will see to that.

Of course, things might change. The government could suddenly come up with a plan to build 1,000,000 homes a year. It could actually work and there would be no housing shortage. Brexit could also result in us having the strongest economy in the world and all of us end up owning, mortgage-free, a grand home with an indoor swimming pool and outdoor BBQ patio. Martians could also land…

The safer bet is that over the medium to long term, house price growth will at least match inflation, and rental income will remain attractive and secure. I wouldn’t bet against it.

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