The housing market is one of those markets everybody likes to keep track of: the main reason being because the majority of working people are homeowners, or would like to be homeowners one day.
In typical periods of economic downturn, the housing market tends to deflate too: the confidence in the housing market is closely linked with the population’s confidence in its economy.
So, why is it then that UK house prices seem to be increasing in 2020, when we are experiencing potentially the worst recession in a century due to the global pandemic, Covid-19?
Why is the UK experiencing a housing boom during the coronavirus pandemic?
The lockdown period prevented some homes from being sold
When the UK went into lockdown on March 23rd 2020, there were some very serious rules around work. The majority of working people found themselves working from home and only “key workers” were allowed to continue working in the public space. This meant that between March and June there were many sales that were meant to go ahead, but never did. This created a backlog of demand, and that has been funneling through the market ever since. At present, the market is experiencing an artificially increased level of housing demand. This is pushing up prices.
The government furlough scheme has helped many people save
The government furlough scheme has proven to be quite successful (for now) with the majority of people. It has meant that people have not lost their jobs and have been paid for not going to work. The government then extended the scheme until October 2020, which has raised many people’s confidence levels. There are also those in the shadow economy, who are probably claiming some furlough, but continuing to work on a cash-in-hand basis. Some people have profited off the back of furlough.
Many jobs in the private sector have been changed to online roles
Many businesses, knowing about the devastation Covid-19 has caused already, have decided to transfer their staff from office roles to home-based roles. Salaries have remained the same. At the same time, people working in London have now become less dependent on public transport and so have not been paying huge monthly fees for inflated train tickets. This has saved many households a fair chunk of change. The time saved travelling to work has also given some people the breathing space they need to do home improvements, put their properties up for sale, and finally, search for new houses themselves.
Take a look at how Zoom Inc’s stock has skyrocketed since March 2020.
Interest rates are lower than ever
Interest rates have some part to play. They have been low for many years, but the current rate of 0.1% is quite simply unheard of. Interest rates represent the cost of borrowing: this plays a major role when purchasing a new mortgaged property.
The government has reduced stamp duty
The government has temporarily increased the stamp duty threshold to £500,000. This is for property sales in England and Northern Ireland: it runs until 31 March 2021.
Anyone completing a transaction on a main residence costing up to £500,000 between 8 July and 31 March will not pay any stamp duty, and more expensive properties will only be taxed on their value above that amount.
On average, this will save buyers as much as £15,000, if they are buying a property of £500,000 or more.
The news of a stamp duty holiday has spread like wildfire, triggering many people to change properties and increase economic activity within the housing market.
We are in a housing bubble and much of it is caused by animal spirits
Keynes talked about the idea of ‘animal spirits’ where people are motivated to act based on natural instinct rather than logic. In times such as these, there is evidence of ‘herding’ activity, where people are motivated to act based on ‘what the herd is doing’. Therefore, good news in the housing market triggers people to sell their properties now: the hope being a short-term profit can be made.
But at some point the bubble must burst as it becomes unsustainable. I anticipate this will be towards the end of 2020 or perhaps a little longer. It depends on various factors such as will we go into another lockdown, will the government extend furlough again, will the stamp duty holiday be extended and other news about the economy.
At the moment, it does seem to be more of a seller’s market, so profit while you can and try to stay ahead of the game.
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