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● Is the sugar rush wearing off? After months of unsustainable house price growth underpinned by a misguided extension to the stamp duty cut, the August RICS survey indicates that demand and prices are set to moderate in the coming months – see chart. A housing market that runs too far ahead of fundamentals is never good news. It only serves to shorten the upswing by turning up the music too loud during the party phase of the business cycle before adding to the headache when the inevitable correction comes – such as in late 1980s/early 1990s or mid-2000s.
● A step too far: The decision to temporarily raise the house price threshold at which stamp duty kicks in (since 8 July 2020), from £125k to £500k, made sense as part of the broad package of measures to support and revive a UK economy mired in the worst recession in modern times. However, with the benefit of hindsight, the decision at the March budget to delay the cut-off date from 31 March 2021 until 30 June, plus a phasing-out period in which the threshold would remain at £250k until 30 September, looks misguided. It only served to excessively stimulate a housing market that was on firm ground anyway. According to Nationwide, house price growth accelerated from 1.8% yoy in the three months to August 2020 to 11.7% in same period for 2021 – the fastest three-month average rate since early 2005.
● Strong fundamentals: While the rebound in activity during the past year would have been softer had potential buyers not been encouraged to bring forward their purchases to make the most of the stamp duty cut, key fundamentals suggest that a rebound would have happened anyway. Supported by easy monetary policies that keep mortgage availability high and financing costs low, a huge stock of excess savings and a stronger-than-expected labour market, the housing market would have likely picked up without the shot in the arm from fiscal policy.
● Where to next? As part of the positive economic story for the UK overall, the outlook for the housing market remains favourable. To compensate for the surge in activity and prices during the stamp duty cut, transactions, vendor instructions and price growth will likely temporarily fall below their longer-run averages in coming months. Thereafter, the market should grow nicely on trend as a growing population and a rising number of households support structural demand, incomes continue to rise and mortgage availability remains favourable.
● Two-sided tail risks: To the upside, we need to watch the risk that the moderation in the forward-looking survey data does not translate into a slower pace of house price inflation. The combination of cheap money and a strong economic recovery could turn the housing mini boom into a genuine bubble. For now, this is a warning rather than a serious risk, though. Tighter regulatory policies should contain any serious excesses. After the 2008 mess, regulators are hawkishly watching for any signs that banks are becoming overexposed to the housing market. To the downside, we still need to watch the low – but not negligible – risk that the UK returns to lockdowns or other harsh restrictions during the winter if hospitals risk becoming overwhelmed with cases of COVID-19. A temporary pause to the economic recovery could turn a housing market moderation into a small correction. While that would knock household confidence and hurt domestic demand, any correction would probably reverse quickly once restrictions are eased again.
Senior Economist
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