UK real estate prices due for a summer breather

UK house price rises have reached a 17-year high, according to the June Nationwide survey citing 13.4% annual growth. Statistically, this pace looks unsustainable, as prices for the rest of the year will be compared with the swiftly rising prices of the second half of 2020. Those base comparison effects will probably show the annual rate of change topping out.
But prices will be steadily rising for quite some time yet. The UK is only in fifth place in the global trend of much of the developed world experiencing rapid house price growth. (New Zealand, Canada, Sweden and Norway come out ahead.) And these gains are appearing despite a retreat of international buyers due to Covid travel restrictions. Eventually, they’ll be rejoining the party. What’s more, price spikes are spreading to rentals. Pretty soon it won’t just be Houston (well, Austin, Texas, this time) that has a problem.
What is noticeable in the latest UK Nationwide survey is that the strongest price gains are in oft-overlooked areas such as Northern Ireland and Wales, though prices there are still, on average, about a third of those in London. It’s good to see some regional leveling up as city dwellers head for the hills in search of value and functioning WiFi. Unlike a decade ago, it’s London now that is wallowing. But there is reason for optimism in the capital, especially when the economy fully opens up, as Bloomberg Intelligence highlights.
Skirting the trend a bit is Scotland, which is “only” up 8% since its tax holiday on property purchases ended in March. The upcoming end of a similar tax break in England will likely only have a marginal effect, because even when the cost of buying a home becomes more expensive, the country’s underlying bullish conditions persist.
One big concern is that house price-to-earnings affordability is nearing its highest levels since 2006. That’s a problem for first-time buyers trying to drum up enough savings to afford the deposit. The flip side is that for those who have secured a mortgage, today’s ultra-low interest rates mean monthly loan payments aren’t that much more than the long-term average for mortgage
affordability.
In other words, those already on the housing ladder have rarely had it so good, while those hoping to get on will keep struggling. By saving this part of the economy with so much stimulus, it’s the younger generations that’ll have to pay.
But what did we expect after such a herculean central bank response to the pandemic recession? No doubt it was better to go big than to fall short in protecting the economy, but some aftercare was always going to be needed. With interest rates never getting far from zero and effective credit spreads charged by mortgage lenders recently tightening further, we’re seeing a boom in demand for property loans. Sprinkle in perhaps unnecessary tax breaks (ahem, England’s stamp duty holiday), tight planning regulations and supply constraints, and then season with a sudden desire to WFH from the countryside, and you’ve got a recipe for surging house prices.

—Bloomberg