Over the last 20 years, there has been speculation of property bubbles, especially during periods of great inflation. These speculations proved correct ten years ago during the reported global financial crisis, which saw property prices fall by 16%. Since then, the market has broadly remained stable and with hopes of an upward trajectory. Unfortunately, everything changed in 2020, when house prices increased by 10%.
What caused the increase and are there hopes of this price bubble popping soon? Read on to find out.
Causes of the Latest Property Bubble
House prices in the UK saw a 10% increase between November 2020 and November 2021. Add that to the 5% increase in March 2020; you get a 15% increase in two years. These figures align with the 2007 global financial crisis, which saw an increase in house prices and exceptional demand. The leading causes of the recent price hike include:
• Lifestyle Changes
The Covid-19 pandemic has fueled a shift in lifestyle and priorities, leaving most of the UK’s population working from home. This new change has seen every square inch of homes utilized, with spare rooms becoming offices and study spaces.
Besides work, the pandemic has caused children to spend most of 2021 being homeschooled. As a result, homes with more oversized balconies, gardens, and courtyards experienced a rise in demand, with many home buyers willing to pay extra to get such properties.
These lifestyle changes have also caused a mass exodus as families began moving from urban locations to rural areas but within commutable distance to major cities. This relocation also saw a significant reduction in demand for apartments and flats.
The pandemic’s restrictions and social distancing caused a record increase in household savings. With more money in their pockets and banks, aspiring homeowners got enough deposits for purchasing new homes. In contrast, others got enough money to upgrade into bigger homes, explaining the increased mortgage approval in the UK.
As a result of the new changes, the demand for property rose exceptionally, with an incredible 68.5% increase from the previous record in September 2020, in spite of the heft prices. This increase in sales outstripped supply, leaving house prices 10% higher than the previous years.
• Government Policies
Due to the financial hardships experienced during the Covid 19 pandemic by many people in the UK, the government announced an extension of the stamp duty holiday, especially in Northern Ireland and England. This action reduced the total cost of purchasing a home by an incredible £15,000.
In addition, the Help to Buy scheme reopened, providing a public subsidy to the property market. As a result, buyers with low deposits benefit from taking advantage of the government-backed loans of 20% in the total cost of the house. The percentage is twice as high in London, totaling 40%.
With more people buying houses and real estate companies failing to build more homes due to Covid-19 restrictions, the demand increased property prices. In England, prices rose to 8.7%, while wales and Scotland saw an 8.4% and 8% increase respectively. Northern Ireland comes in with the lowest increase of 5.3%. The Northwestern parts of the UK saw the highest annual growth of 11.9% on average, with London recording the lowest at 4.6%.
Popping the Property Price bubble
For the first time in the past two years, the property market is showing signs of cooling off. The incoming changes come as reduced stamp duty rates ended in October, increasing interest and inflation rates. As a result, property sales dropped by 30%, as aspiring homeowners rushed to take advantage of the tax break in September.
Also, due to the ongoing fuel crisis and supply shortages caused by the pandemic restrictions, there are signs of rising inflation and a high cost of living. The new circumstances have seen a tumble in consumer confidence, seeing more people settling in their current homes rather than trying out the volatile property market.
Mortgage interest rates are also set to rise, making buying new homes a less appealing idea. Confidence in buying new homes is also decreasing due to the risk of new Covid-19 variants, leaving many people and banks in fear of job cuts and increased unemployment rates.
As such, the house price bubble is likely to pop in the coming months as the number of house sales is most likely to decrease.
