Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

For many months now, commentators have cautioned that recent rises in house prices are unlikely to last long. A combination of temporary factors, such as a stamp duty “holiday”, had created ripe but fleeting conditions for a mini housing market boom. 

In December, after reporting a 1.2% month on month rise in prices, Nationwide said: “Housing market activity is likely to slow in the coming quarters, perhaps sharply, if the labour market weakens as most analysts expect”. In March, the message was much the same: “If labour market conditions weaken as most analysts expect, it is likely that the housing market will slow in the months ahead.”

Now, the caution remains, but it’s of a different nature. In Nationwide’s House Price Index for May, the initial message sounded familiar - “If unemployment rises sharply towards the end of the year as most analysts expect, there is scope for activity to slow, perhaps sharply” - but came with an added caveat: “even this (slowdown) could potentially be offset by ongoing shifts in housing preferences, if current trends are maintained.”

Concerns are growing that prices won’t come back down. Chief economist at the Bank of England, Andy Haldane, has warned of a market “on fire”, which could worsen inequalities between rich and poor, and old and young.

Temporary drivers or structural shifts?

It’s been a rollercoaster 12 months for the housing market. Activity collapsed at the start of the pandemic, but has since risen dramatically. Those rises were clear in activity levels last month. 

Halifax reported an annual house price growth of 9.5% in May, its highest level in nearly seven years. Prices were up 1.3% on April. The findings are similar to Nationwide’s, which reported a 10.9% annual rise and a new record average price of £242,832, up £23,930 over the past twelve months.

One reason for the market’s resurgence has been the temporary cut to stamp duty for properties up to £500,000 announced by the chancellor, Rishi Sunak, during his Summer financial statement in July. That amounts to a maximum saving of £15,000.

The stamp duty holiday, recently extended to the end of June, may have been particularly effective last month. Anecdotal evidence from estate agents suggests a busy start to the month, as buyers looked to get deals over the line in time for the June deadline, followed by a slowdown in the second half.

But other factors are also at play. Nationwide reported that 75% of homeowners moving or looking to move in April would have done so even if the stamp duty holiday had not been extended. 

Some may prove fleeting. Activity may slow as restrictions relax and wealthier households find other ways to spend cash accrued over the past 12 months. Current record low interest rates have also made servicing a mortgage easier. 

But others may leave a lasting impression on the market. Nationwide suggested that, principally, “it is shifting housing preferences which is continuing to drive activity, with people reassessing their needs in the wake of the pandemic.”

Those preferences have been clear through much of the pandemic. With many white-collar city-dwellers now working more flexibly, they’ve used the pandemic to reassess their living situation. That’s driven a so-called “race for space”, with most buyers moving away from urban hotspots and toward rural tranquillity. Greater London has experienced the slowest growth in prices across the UK. Wales and the North West have seen the fastest. 

This points to a more permanent shift in the market. Halifax put it like this: “The current strength in house prices also points to a deeper and long-lasting change as buyer preferences shift in anticipation of new, post-pandemic lifestyles”.

Andy Haldane also warned about mismatches between limited supply and mounting demand. He said that without “doing something of a longstanding nature with the supply side of the UK housing market, inevitably we’ll see the sort of relentless rise in house prices relative to incomes that we’ve seen over the past 30 to 40 years”. It was a warning echoed by Nationwide: “With the stock of homes on the market constrained, there is scope for annual house price growth to accelerate further in the coming months”.

All this is now prompting serious concern. House prices are already beyond the reach of most young people looking to step onto the property market. Further rises would likely worsen existing wealth inequalities, especially when savings accrued over lockdown have been skewed towards the wealthier households, and the removal of furlough is likely to have a greater impact on poorer.

Rising prices are also tied to wider inflationary concerns. The Bank of England is monitoring the housing market out of fear that demand will outpace supply and feed into a general inflationary uptick.

All this remains deeply uncertain. Andy Haldane’s concerns may be unfounded - as Nationwide notes, “there is scope for activity to slow, perhaps sharply”. But there’s also scope for prices to rise even further.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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