Market Commentary – June 2021

Rampant House Price Growth

Weighting and Wondering

First Time Buyer Squeeze

House prices are still rising rapidly and market activity is higher than pre-pandemic levels. But the temporary cuts to property transaction taxes have now ended or are in the process of being tapered off. This should bring greater clarity on the drivers of the current housing boom but it appears the higher than normal levels of market activity and rampant house price growth could continue past their end. However, there are some issues with the house price growth rates currently being reported that could mean price growth is lower than they suggest. Meanwhile, new data provides further detail on the squeeze that has been facing first time buyers since the pandemic started.

Rampant House Price Growth

House prices are rising rapidly and each month brings news of new record highs. The Nationwide index reported an annual house price rise of 13.4% in June while the ONS reported annual growth of 8.9% for April. Rightmove’s index was suspended this time last year but it too is reporting rapidly rising prices. As Fig 1 shows, after two years of relatively low house price growth through to the end of 2019, the pandemic has set off a housing boom. We’ve explored the possible drivers of the current boom in previous commentaries (e.g. April 2021) and the end of the temporary property transaction tax cuts (Wales & Scotland) and tapering off (England & Northern Ireland) will bring further clarity on how much of a role they have had in driving the current boom. Meanwhile, evidence suggests activity is continuing at higher than normal levels, even for those that will miss out on the tax cuts.

For example, Rightmove reported that sales agreed in May were 17% higher than the same month in 2019. They also reported the number of sales agreed on homes priced over £500k was 49% higher. It is increasingly clear that, along with evidence of international housing booms, the pandemic and resulting economic conditions has led to a upwards revaluation of housing independent of the tax cuts. However, only time will tell how much of that revaluation is possibly temporary (e.g. low interest rates & government support) and how much is permanent (e.g. the capitalisation of commuting costs into house prices).

Weighting and Wondering

It is clear that there is a housing boom but the image presented by some of the house price indices is murkier than might initially appear. For example, we estimate that around 4 percentage points of the 13.4% annual growth reported by Nationwide in June is due to negative valuer sentiment last year. Meanwhile, we’ve previously reported on the challenges faced by ONS due to the lag in Land Registry registrations. Another possibly important factor is that all the above mentioned indices are weighted by transaction volumes. As Fig 2 shows, there’s been a big shift towards higher value transactions since last summer which could lead to higher reported house price growth. Meanwhile, the Zoopla index is stock rather than transaction weighted and reported annual house price growth of 4.7% in May.

First Time Buyer Squeeze

Prospective first time buyers have been hit hard by the pandemic, economic fallout, credit crunch, and current housing boom. Until now there was limited public information on what had happened to them during the pandemic. But thanks to new data released by the FCA this week, we now have a much better understanding of what has happened. This section looks in more detail at some of the trends highlighted by the FCA data and other sources since the pandemic hit. There is more analysis of the FCA data in our Digging Deeper slide deck.

The FCA data shows mortgage completions by first time buyers had recovered at a similar rate to mortgaged movers in the summer and autumn of 2020. However, since Nov 2020, their numbers have stayed high but not experienced the further growth seen by mortgage movers. Our estimates suggest this gap widened in Q1 2021. This situation raises two inter-linked questions: How have first time buyer numbers recovered to pre-pandemic levels despite the challenges they face but why have they not grown to the same levels as mortgage movers.

The answer to the questions lies in the balancing act between market activity and affordability. As Fig 4 shows, the credit crunch dramatically reduced sales at higher LTV ratios which should’ve reduced activity. But, possibly thanks to the unique circumstances of the pandemic, the fall in first time buyer sales above 85% LTV was more than compensated for by the rise in sales with LTVs of up to 85%. It is not yet clear if this was thanks to first time buyers able to increase their deposit and bring down their LTV or the housing boom bringing in new borrowers with higher deposits.

Given the wider trend in rising household savings, it’s possible that many prospective first time buyers saved enough during lockdown to make up the difference. However ONS data shows the average income of a first time buyer has risen rapidly since the pandemic which suggests a change in who is buying. Irrespective of which is correct (a bit of both), the total number in both groups will be  limited. Therefore, the recovery in the higher LTV mortgage market will be essential. Meanwhile, as Fig 5 shows, there are some markets where the balance between affordability and first time buyer activity is more finely balanced at much lower numbers.

Market At A Glance

Economy – UK

The ONS reported a 2.3% monthly rise in GDP during April though the economy is still 4.0% smaller than January 2020. The second estimate of GDP for Q1 2021 reported a 1.6% fall in the quarter (prev. -1.5%) though this reflects the lockdown in January and February. This data will almost certainly be revised in coming months and years.

House Prices - UK

Rightmove reported another record high in asking prices in June. We are unable to calculate annual growth as their index was suspended last year. Nationwide index reported a 13.4% annual rise in their mortgage approval based index over the same period and the ONS is reporting growth of 8.9% in the year to April 2021.

Transactions – UK

HMRC provisionally reported 114,940 transactions in May, a 4% fall compared to last month. However, they were still 16% higher than the 2013-19 average. Meanwhile, the Bank of England reported a small rise (0.7%) in mortgage approvals for house purchase in May when compared to the previous month.