The UK’s property bubble – what will happen next?

22 May 2021

Are we about to see the UK property bubble burst? asks Jamie Johnson, CEO, FJP Investment.

It is clear to all observers that the UK’s property market is growing at a remarkable rate. Indeed, some would go further and say that a bubble has formed.

According to the latest figures released by the ONS, average house prices rose by 8.6% between February 2020 and February 2021. This is the largest rate of annual growth the UK has seen since 2014. Moreover, according to Halifax, house prices were up 1.4% in April 2021 alone, capping at a record average property value of £258,000. When considered alongside the 15-year peak in property transactions observed in March, there is significant data demonstrating the robust health of the property market at present.

What remains uncertain is if, or when, the bubble will burst, and prices will come tumbling back down.

Following such accelerated growth, investors must scrutinise the potential for this uptick in prices to be sustained. I anticipate that the market will, in due course, struggle to continue growth at this record pace, with the tapering down of the stamp duty holiday like to stabilise the market somewhat; however, a plateau should be expected instead of a sharp crash.

Some bubbles simply do not burst – and the bullish health of the real estate sector means it is well-placed to take advantage of the current flow of capital and prevent any substantive decline in house prices. In fact, with considerate and appropriately creative measures, prices need not fall.

Unlikely to burst

The cessation of the stamp duty holiday, which is currently planned to begin tapering down from 1 July until a return to normal levels from 1 October, can be identified as a potential catalyst for such a crash. Certainly, it played a major role in bringing about the rush in demand in the first instance.

As noted, the reintroduction of stamp duty should stabilise the market. The twin factors of higher costs in buying, and the anticipated rush to instruct and complete purchases while the tax relief remains in place, should naturally lead to slower months towards the end of this year. However, to suggest that the tax break is the sole factor driving people towards property purchases – as has sometimes been the narrative of late – is foolish.

Demand for property in the UK is constant. Whether purchasing with the intention of occupying, or investing for regular yields and longer-term capital growth, the British public have high levels of trust in bricks and mortar.

For instance, an independent survey commissioned last year by FJP Investment of over 850 UK investors, found that 48% consider property as a safe asset in the midst of a pandemic, compared to just 12% who did not.

While many sectors suffered in the midst of unprecedented uncertainty and radically altered consumer and business behaviours, real estate has undeniably thrived during the pandemic. In fact, it can even be argued that the property market has flourished as a direct result of medium-term instability in the UK. In the past five years alone, for instance, the country has had three Prime Ministers, two general elections, an extended debate over the ramifications of the Brexit vote, the implementation of withdrawing from the EU itself, and Covid-19.

The secure reputation property holds in the UK has been beneficial in drawing investment in this unstable period, with investors and consumers looking to ‘safer’ assets. The average house price in 2016 was reported at £220,000, meaning there has been a five-year increase of around 20% since then. Such an inexorable upward trend will not abate because of the removal of an emergency short-term fiscal measure.

A long-term outlook is required

Bust does not always have to follow boom. The Government must, however, look to further its support for real estate. Continuing to stimulate demand and facilitate high levels of transactions will be crucial to maintaining house prices and protecting investments. In doing so, creative measures must be considered.

To that end, the announcement of an overhaul of the planning system in the Queen’s Speech was largely welcomed within the property sector; it should allow investors and developers the opportunity to address low housing stock, which has limited the market in many areas. It will also provide the necessary flexibility to capitalise on emergent trends following the pandemic; accelerated housebuilding in rural areas to meet the exodus of city workers from urban areas would be beneficial for a start.

Taking advantage of England’s reported 650,000 empty homes would be another strong measure to allow all interested parties to benefit. Local councils should be encouraged further to use existing powers to bring them back into use with more vigour – this could prove important in unlocking the ability of younger people to enter the property market.

Clearly, the pandemic has had a tremendous effect on our economy and society. It has also elucidated that no forces of nature can dampen the great British enthusiasm for bricks and mortar. While the current rate of growth might not be sustainable, the love affair between the public and property should provide the conditions for stability and a positive long-term outlook – if the Government can be bold enough to support and stimulate the market in the months and years to come.

Professional Paraplanner