One would imagine with the economic disaster caused by the pandemic, the prices of property would have plummeted. This is what was envisioned for 2021, but the predictors could not have been more incorrect. On the contrary, there has been a major boom in the real estate market, with house prices rising by nearly 12% over the previous year! This fact can be borne out by experts all over the country and especially the estate agents in Cheltenham, in South West England, where house prices have risen enormously over the last year.
We look to see why, or how, house prices keep rising, despite inflation being so high and with so much unemployment.
Low interest rates: This is one of the main factors for the rise in house prices. To deal with the pandemic crisis, the Bank of England maintained a low base rate of 0.1%. This enabled brokers to offer very attractive low interest mortgages for which there was a general clamour. Due to competition, even lower rates were offered. In turn, the subsequent demand for property led to a rise in house prices.
Some banks have raised their mortgage loan amounts to 5.5 times the salary for higher earners, with very good income stretch mortgage rates. This has prompted some in the higher income bracket to invest in property or additional property.
The SDLT holiday: The stamp duty land tax holiday introduced in 2020 was a great incentive for people to invest in property, especially since there was a phasing out programme right till the end of September, 2021. The 95% mortgage scheme which was also brought into effect by the government added fuel to the fire. The savings on stamp duty coupled with the low mortgage rates attracted prospective property buyers like bees to a honeypot. Thus, the rush for property caused the prices to naturally rise as well.
Change in lifestyle: During the pandemic, people have had to work online, from home, at the time of lockdowns. This has set a trend for a change and better quality of lifestyle. Despite life returning to near normalcy, many people continue to work from home, either full time or part-time. The result has been a desire for larger, more spacious accommodation, including a nook for an office as well. Independent homes with outdoor and garden space for relaxation have become more popular, especially in the suburban or rural areas. Consequently, a rise in the price of such homes has been the outcome.
Unexpected savings: Many expense outlets closed during the lockdowns, such as restaurants, pubs, shops, entertainment venues. This resulted in people not spending as much as previously. Some folk were able to put away a tidy sum as savings. With the urge to move to bigger and more comfortable homes, some have invested such savings in property which has led to an increase in property sales and, consequently, property prices.
Demand against supply: The demand for property far exceeds the supply and so long as that ratio exists, property prices will keep rising. The demand is from all sectors – first time buyers, second home purchasers and professional investors. The “race for space” – to buy property before it becomes more expensive and to “cash in” on the good mortgage deals has resulted in a hike in demand which, in turn, has led to an increase in prices!
Rental market: Many people have chosen independent accommodation rather than apartments and have moved to suburban or rural areas. However, with the successful processing of the Covid vaccination programme and a near normal lifestyle back, the demand for rented accommodation has also risen. With schools and universities reopening, the student rental market is in high demand. Prospective buyers and landlords have taken advantage of lower rates for flats and apartments with a look at a profitable ROI (return on investment). With the demand for rented accommodation increasing, the prices will rise as well.
Conclusion: So far, house prices have been soaring. However, the end of the furlough scheme has resulted in less monthly income. Together with the high cost of living, it is making it more difficult for people to save sufficient amounts of money. With inflation increasing, interest rates are likely to rise. There will be a subsequent increase in mortgage interest rates. Should this happen, there may be a slight slump in house purchases which may cause prices to stabilise and not rise as high as they have been. Of course, this is just a forecast and we know how sometimes such predictions do not turn out as expected. So, while there may be a decline in the purchase of property, the “bricks and mortar” market has remained popular and has always been a good method of investment. Whether property prices will continue to rise remains to be seen.