Market Commentary – May 2021

Fear Of Missing Out

Continue Cycle or Start New

Last month’s market commentary looked at whether the housing market is in a bubble, short-term boom, or a new normal. We concluded that it was too early to know but there are some rational explanations for what is happening to the housing market here and in other countries. Since then, the market has continued to boom with high levels of sales agreed, low levels of homes being listed on the market, and rising house prices. But, as the boom continues, there is one factor that could increasingly lead to irrational decisions: the fear of missing out.

Fear Of Missing Out

There are a number of factors that affect house prices over the longer term such as new supply, demographics, household incomes, and interest rates. But perhaps the most important one in the short term is buyers’ sentiment. Prospective buyers’ sentiment is driven by wider social and economic conditions. But what is happening in the housing market is also important, with future expectations of house price growth a key driver. And, in a feedback loop that are so often found in housing, these expectations are largely determined by recent trends in house prices. For example, academic house price models typically include recent trends in nominal prices (usually over a few years as per Fig 1 below) as a proxy for expectations while our own research has found a positive relationship between high nominal house price growth and the number of home movers. There is also the risk that, through buyers’ sentiment, a housing boom can become a self-inflating bubble if conditions allow.

For the time being the housing boom is continuing, with house prices rising as buyers compete for the limited stock available to buy and the new stamp duty deadlines near. This month Rightmove reported 52% higher “buyer demand” in April 2021 compared to April 2019 and Zoopla reported 22% more sales agreed in the year to date than the 2020 average. Under these conditions, it is no surprise that ONS reported a 10% annual rise in UK house prices in the year to March. That was the highest rate since August 2007 and, though subject to revision, price growth is likely to continue at similar rates in coming months.

With rampant house price growth, limited numbers of homes available to buy, and prospective buyers motivated by a year spent locked down in their homes, buyer sentiment remains strong. In some areas, it is so strong that we are now starting to see some signs of overheating. There are news reports about queues to reserve new build homes, offers over asking price (outside of Scotland), and gazumping. The time constraint imposed by a stamp duty holiday doesn’t help. While the current market is more likely experiencing a boom than forming a bubble ready to burst, the self-reinforcing impact of rising house prices could encourage individuals to dangerously stretch themselves for fear of missing out and being forever priced out of the housing market. This situation suggests the first proper test of mortgage regulation since the financial crisis could be measured by how well it dampens market exuberance rather than how well it protects buyers and lenders from a house price crash.

Continue Cycle or Start New

Following a recession, the housing market typically follows a cycle with house prices in London recovering the quickest before growth spreads out and eventually reaches the lowest priced parts of the market in the north of England and the rest of the UK. A key question this time is whether the current boom is a continuation of the pre-pandemic housing market cycle or the start of a new one. The evidence so far (e.g. Fig 1) appears to suggest it’s a continuation of the previous cycle. Further analysis also shows lower price to income multiple markets are more likely to be reporting the biggest annual rises in house prices. However, some of this may be driven by constraints in the mortgage lending market and the future attractiveness of London is still uncertain as the pandemic continues.

Market At A Glance

Economy – UK

The ONS reported a 0.7% monthly rise in GDP during March though the economy is still 6.2% smaller than January 2020. The first estimate of GDP for Q1 2021 reported a 1.5% fall in the quarter though this will largely reflect the lockdown in January and February. This data will almost certainly be revised in coming months and years.

House Prices - UK

Rightmove reported a 6% rise in asking house prices in the year to May based on interpolated data for 2020. Meanwhile Nationwide reported a 7.1% annual rise in their mortgage approval based index over the same period and the ONS is now reporting very high growth in its sales agreed index with a 10.2% rise in the year to March 2021.

Transactions – UK

HMRC provisionally reported 117,900 transactions in April, a 36% fall compared to last month. However, they were still 19% higher than the 2013-19 average. Meanwhile, the Bank of England reported another fall in mortgage approvals for house purchase in March compared to February but they were still 32% higher than March 2019.