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    Are house prices about to fall?

    26 November 2020

    Quite the oddest thing this year has been the strength of the property market. How can the economy collapse by 20 per cent as it did in the second quarter, and yet house prices and transactions end up rising? The 7.5 per cent annual change in house prices measured by the Halifax in October is remarkable enough, but no less notable is the rise in property transactions, which in October were running at 8.1 per cent higher than in October 2019. November’s results were equally surprising: prices grew at an annual rate of 6.5 per cent.

    There is anecdotal evidence of people not having left their homes since March, so terrified are they of Covid-19. Yet for another tranche of the population, the pandemic has provided the incentive not just to venture out of the front door but to seek a new front door. That is astonishing, given how many people have lost their livelihoods over the past few months, and how many more might find themselves redundant by next spring when the furlough scheme – presumably – finally ends. It is all the more strange when you consider that the cladding scandal has made many thousands of flats effectively unsaleable. Past wisdom says it is confidence which drives the housing market – when people are feeling confident about their future prospects they are far more inclined to move home. Not any more. A housing boom has been conjured out of the most uncertain of times.

    A large part of it is presumably down to Rishi Sunak’s stamp duty holiday. If the government has learned anything from this it is the depressing effect of stamp duty on the housing market. The requirement to pay thousands of pounds in tax to buy a new home really does put people off moving. The pandemic, too, has encouraged a particular kind of mover – if you have long dreamed of moving out of a large city, Covid-19 has given you all the incentive you need. The bars, theatres, restaurants have been closed, along with the shops for weeks on end. Public transport has been curtailed and Covid-19 infection rates are far higher than in the countryside. It is entirely logical, with much of the attraction of city life draining away, that rural estate agents have been reporting a busy year – although there must be people, too, buying the properties which are being sold to fund moves to the country.

    But whatever the reasons for people moving house, it doesn’t look as if the boom will necessarily last through winter until the end of the stamp duty holiday on 31 March next year. While completed housing transactions increased sharply in October, the same is not true of valuations – which are a leading indicator of completed sales. They have dropped sharply since a bulge in June, as Britain began to emerge from the first lockdown. Statistics gathered on valuations by a website Property Price Advice, were running at 70 per cent above the four year average. By October they were still high, but a more modest seven per cent above the four year average. Meanwhile, there is evidence of homes being reduced in price sharply, having failed to catch the summer’s mini boom. It is hard to see how momentum in the housing market will be sustained over the coming months, with the country remaining under serious restrictions. But then it would have been hard to foresee, either, how the market would have taken off in the summer.

    There is another lesson for the government from this mini-boom, beyond how high levels of stamp duty suppress the housing market. The performance of housing and stock markets since April has been a demonstration of how liquidity pumped into markets via quantitative easing will somehow find a way of passing through rapidly into inflation – not consumer inflation, it seems, so much as asset price inflation. This is what happened in 2009 and it is what has happened again in 2020. Whether or not quantitative easing and ultra low interest rates stimulate the economy, they certainly pour fuel on the first of asset prices – much to the benefit of those who own assets.