A 10% increase in 12 months – are house prices in a bubble?

Over the last year, house prices in the UK have seen a 10% increase. The property market is booming, fuelled by the Covid-19 pandemic which suddenly saw people working from home, homeschooling, and staying in more than ever before. This, coupled with the reduced rates of stamp duty which came to an end on 1 October 2021, has meant that property prices have risen and stayed high during the last 12 months. However, with higher property prices comes speculation; will this rise be sustained, or will this price bubble eventually burst?

From November 2020 to November 2021, Nationwide reported a 10% increase in house prices, meaning that prices had risen around 15% compared to pre-pandemic figures in March 2020. It also puts house price growth in line with levels seen before the global financial crisis of 2007, with the housing market seeing an exceptionally busy year in terms of the number of property sales too. According to monthly property transactions figures released by HM Revenue and Customs, the number of transactions in September 2021 was 160,950, an incredible 68.5% higher than September 2020.

Demand for houses is outstripping supply which has kept prices high, and this has been fuelled by the shift in lifestyle and priorities brought about by the Covid-19 pandemic. With the vast majority of the population working from home, every square inch of extra space has been given over to working from home set-ups, with spare rooms being transformed into studies and home offices. 

Children also spent a considerable proportion of 2021 being homeschooled, meaning extra space for schoolbooks, quiet study and online lessons became essential. Gardens, courtyards, and balconies came into their own, with homebuyers willing to pay far higher prices for houses with larger outdoor spaces and spare bedrooms.

These lifestyle changes caused a mass exodus from urban areas, with rural locations becoming highly desirable, especially those within a commutable distance of major cities, even with a hefty price tag. The demand for flats and apartments has dropped, while the need for family homes and larger dwellings has increased as people’s priorities change.

Households have also seen a record increase in savings built up during months of restrictions and social distancing. This means people have more money available to use on a house deposit, which could be another factor which explains the recent high level of mortgage approval seen in the UK.

Whilst in previous house price booms we have seen the biggest price increases in London and the South East, 2021’s price rises have been more spread out across the UK. People no longer need to live close to London offices and are choosing properties with more space rather than living in the bustling capital. Figures from the Office of National Statistics show that London has actually seen the lowest increase in property prices over the last year, with the North East, North West and the East Midlands enjoying the biggest rises. The average house price in the UK was £270,000 in September 2021, an incredible £28,000 higher than at the same time the previous year.

However, in recent months there has been some evidence of the market cooling off, as reduced rates of stamp duty ended in October and interest and inflation rates look set to rise. The number of house sales was down 30% in October from the previous year, as people rushed to complete on sales during September to take advantage of the tax break. There have also been reports of rising inflation rates as the cost of living increases due to supply shortages and the ongoing fuel crisis, which has only been heightened by the Brexit fallout. This increase has seen consumer confidence take a tumble, with people more likely to stay put in their current home rather than look to move in a more volatile market. 

Interest rates may also be set to rise meaning an increase in mortgage payments for homebuyers, another factor which makes buying a new home less appealing. The risk of new variants of the Covid-19 virus has been a factor in damaging consumer confidence too and may affect the wider economy, leading to job cuts and rising unemployment rates. As such, we are likely to see a drop in the number of house sales the market can expect in the coming months.

So, how can we tell if the current house price rise is in fact a bubble, and should we be concerned about it bursting? A number of factors would suggest that this increase in house prices is circumstantial due to the extraordinary conditions of the Covid-19 pandemic. This means that as society returns to more normal levels of economic activity, we should see house prices gradually even out. The return to offices and schools, the end of the stamp duty holiday and the end of Covid 19 restrictions mean that the market (should!) return to expected levels of activity.

However if inflation remains high, the Bank of England may choose to raise interest rates in order to manage inflation, leading the housing bubble to burst more severely and more quickly. This in turn would affect consumer spending and the ability to pay off any debts which could be disastrous for both individual homeowners and the wider economy. Only time will tell whether the bubble will burst or gradually deflate, but for now at least, house prices look set to remain high.