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Annual house price growth jumped from 6.4% in January to 6.9% over February, with a month-on-month increase of 0.7%, according to the latest Nationwide House Price Index.
Though suffering a small decline in January, house prices have proved robust throughout the pandemic. The average house price in the UK now stands at £231,061, the highest on record.
Two factors in particular have supported house prices through the last 12 months. The first comes down to the changes the pandemic has wrought on people’s working habits, along with their priorities. With many city-dwellers now working more flexibly, they’re seizing the opportunity to replace wistful afternoons spent watching Escape to the Country with the real deal.
According to the Office of National Statistics (ONS), the North West was the English region to see the highest annual growth in average house prices last year (11.2%), while London saw the lowest (3.5%).
The second is 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.
Expectations were that the supportive effects of the stamp duty “holiday” would lessen as we approached its 31 March end date. Instead, what we’ve seen this month is the opposite. February’s 0.7% rise in prices is a far cry from the 0.3% fall forecasted by economists polled at Reuters.
It also caught Nationwide off guard. The building society said: “This increase is a surprise. It seemed more likely that annual price growth would soften further ahead of the end of the stamp duty holiday, which prompted many people considering a house move to bring forward their purchase.”
One explanation for the rise is a desperate dash to get deals over the line before 31 March. Given though that the purchase process usually takes a few months, this would be odd. Rightmove estimates that around 100,000 buyers who agreed a purchase last year but have not completed their moves will have to pay the tax if the 31 March deadline remains.
There are other possible explanations. It’s likely that the stamp duty holiday is still providing a sense of momentum, along with the faster-than-expected vaccine rollout and good weather towards the end of February, which together are enthusing would-be buyers.
And while they’re unlikely to have affected demand over February, rumours have emerged that the Chancellor will reveal plans to extend the stamp duty holiday until June in tomorrow’s Budget. That could have a large bearing on demand over the short term. Zoopla estimates that around 750,000 home buyers are set to have benefitted from the stamp duty holiday, saving themselves nearly £5 billion in tax. Rightmove estimates that an extension until the end of June could result in a further £1.75 billion saving.
But stamp duty won’t be the only thing to watch in tomorrow’s Budget. The Chancellor is also expected to announce a new mortgage guarantee scheme which will allow buyers to obtain a mortgage with only 5% of the property’s value put down as a deposit.
The Treasury will guarantee a portion of the loans on properties up to £600,000, reducing the risk banks take on in offering higher loan-to-value mortgages.
And, like the stamp duty holiday, it’s intended to help first time buyers take their first step onto the property ladder. The results for the former in this regard have been mixed. The current stamp duty saving on a house costing £250,000 is far outweighed by the hike in prices since July. According to the ONS, property prices rose 8.5% over the year to December 2020, the highest annual growth rate since October 2014.
The stamp duty holiday may well have encouraged first time buyers onto the ladder, but it’s unlikely to save them any more in real terms than if they’d moved this time last year.
The Chancellor’s mortgage scheme, starting in April, is expected to push house prices even higher than their now record peaks.
Moreover, this remains an uncertain market. The trajectory might look positive, and could well stay that way if expected support measures materialise in the Budget. But we’re not out of the woods yet. The UK jobless rate is at its highest level in five years, with younger workers bearing the brunt. Unemployment rose to 5.1% in the three months to December, and economists fear that figure could get significantly worse before the end of the year. If labour markets worsen as expected, and continue to hit young people hardest, it is likely the housing market will slow soon.
Housing is just one area to keep an eye on in tomorrow’s Budget. We’ll be providing a round-up of everything the Chancellor has to say on our Markets and Insights hub page. In the meantime, you can find our current predictions here.
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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