It’s probably not a surprise that the housing market has slowed down over the course of the past year. The extent of the slowdown may, however, come as a surprise. HMRC recorded 55.1% fewer sales in June 2022 than in June 2021. Here is a quick look at the three main factors that may lie behind this and what they mean in practice.
The end of the SDLT holiday
Quite possibly, the single biggest driving force behind this drop is the end of the SDLT holiday. The decision to pause Stamp Duty may have done a lot to keep the economy relatively strong during the pandemic. It was, however, almost inevitably going to result in a post-holiday financial hangover.
The holiday period was a massive incentive for people to push forward buying and selling decisions. As such, it was effectively setting the scene for at least some level of housing slowdown after it ended. Realistically, only time can address this. Over time, life events will require (or at least encourage) people to move. This will help to set the housing market back on a “business-as-usual” footing.
Broader housing cycles
Home sales are generally compared to sales at the same time in the previous year or years. The reason for this is that the housing market goes through recognisable micro-cycles. In a typical year, spring and autumn are much more active periods than summer and winter. On a broader level, however, the housing market goes through larger-scale macro-cycles.
At the start of a cycle, house prices are low. This engages buyer interest and causes prices to rise. Eventually, prices reach a point where they are no longer affordable. Buyers then drop out of the market and prices flatline or drop. Occasionally, they crash but this is highly unusual. Over time, wages catch up with house prices and the cycle begins again.
This cycle is a constant in the housing market. Last year, however, its progress was influenced by the SDLT holiday. The buying and selling frenzy this created pushed up house prices well beyond normal levels. So far, they appear to be holding steady. This suggests that, going forward, there will be fewer transactions but at higher prices. Again, only time can address this.
Inflation and interest rates
Post-COVID19 (and post-Brexit), the UK is definitely not the only country dealing with uncomfortably high inflation. It is now looking increasingly like the Bank of England is going to take a fairly hard stance with it. The BoE may not be in a rush to raise interest rates. At the same time, they are clearly not going to risk being seen as hesitant about it either.
Realistically, the actions of central banks can be as much about sending a message to the markets as about directly influencing inflation. With that said, the BoE still has to maintain its credibility. In other words, if it says, or even indicates, that it will do something in a certain set of circumstances, then it needs to show itself willing to follow through.
What that means in practice, therefore, is that the UK can expect the BoE to keep on raising interest rates until inflation is clearly within tolerable levels. This is obviously going to increase the cost of borrowing in general and mortgages in particular. It may not affect existing home-owners. Many of these are likely to have locked in fixed-rate deals. It will, however, affect first-time buyers.
On the plus side, higher interest rates will also increase the returns on cash deposits. This could be very helpful for people saving for deposits. At a minimum, it will help their savings to grow more quickly. At best, it could even provide people with extra motivation to prioritise saving.
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