Will house prices collapse at the end of the holiday?

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UK house prices have hit a new record high of £ 227,826 on average, but economists, financial institutions and others in the property market have warned that could drop as the government’s holiday program ends this week.

According to the Nationwide Building Society, annual home price growth reached a five-year high in October, increasing 0.8% month-over-month since January 2015.

The unexpected mini boom in the real estate market has been spurred by people looking for homes with more space amid the coronavirus pandemic, as well as homebuyers looking to beat the stamp duty holidays, which are coming up. end next March.

The stamp duty exemption covers the first £ 500,000 of a property purchase until the end of March 2021, offering buyers a savings of up to £ 15,000.

Historically, rising unemployment translates into falling house prices. In 1993, when unemployment in Britain rose to around 10.5%, house prices fell by 20%. After the financial crisis of 2008, unemployment fell to around 8% and was associated with a further 20% drop in house prices.

In the three months leading up to August of this year, the unemployment rate stood at 4.5 percent, which equates to about 1.5 million people out of work. Although the housing market appears to oppose the downward trend as unemployment increases, further job cuts mean fewer people can afford a mortgage.

The end of the holiday program on Oct. 31 is expected to trigger a landslide of job losses, and Nationwide’s chief economist has warned that real estate market activity will likely slow in the coming months as the market of work would weaken.

Robert Gardner said: “The outlook remains very uncertain and will depend heavily on how the pandemic and measures to contain it evolve as well as the effectiveness of the policy measures implemented to limit the damage to the economy as a whole. .

“Behavioral changes resulting from Covid-19 may support activity in the housing market, while the stamp duty holiday will continue to provide a short-term boost in pushing purchases forward.

“However, activity is expected to slow in the coming quarters, perhaps sharply, if the labor market weakens as most analysts predict, especially after the stamp duty holiday expires at the end of March,” he added.

In September, the Center for Economics and Business Research predicted that house prices would fall nearly 14 percent next year, with property values ​​expected to start falling “significantly” towards the end of this year.

“The temporary nature of the tax cut means that the short-term effects of the policy could be even more dramatic as people rush to complete transactions before the return to the previous stamp duty regime at the end of March 2021” , Cebr said.

Russell Galley, chief executive of Halifax, said there was a lot of uncertainty surrounding the outlook for the housing market, adding that it was “very unlikely that the housing market will continue to remain immune from the economic impact of the pandemic and we believe that significant downward pressure on house prices should be expected at some point in the coming months ”.

The international real estate agency Hamptons International has a similar prediction. In its September forecast, it forecasted a 2.0% increase in house prices in 2020, before stagnating in 2021.

Aneisha Beveridge, head of research at Hamptons International, said: “The real challenges will not be felt until 2021. The economic consequences of the Covid-19-induced recession will pull the housing market off its long growth path. term. While some economic recovery should have taken place to cushion the withdrawal of government support, we still expect the housing market to slow down next year. ”

The end of the leave scheme also coincides with the end of free overdrafts and mortgage holidays, measures put in place by the financial services industry to help clients during the crisis.

The government’s budget watchdog, the Office of Fiscal Responsibility (OBR), said in its July fiscal sustainability report that in its most optimistic “upside scenario”, house prices will fall by only 2% for 2020, followed by a rapid recovery before – Crisis trends.

However, if unemployment hits an all-time high, the OBR predicts a 22% drop in house prices in 2021, followed by a period in which prices will remain about 10% below the trend forecast in March of this year.

In its analysis of the OBR report, the Resolution Foundation think tank also noted that in the past, lower interest rates led to real house prices rising. “However, with interest rates close to zero, the significant interest rate cuts that drove up house prices in previous recessions cannot be repeated today,” he added.

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