What causes high house prices?

What causes high house prices?
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As we all know, house prices are skyrocketing. Mortgage lender Halifax says prices in June were 8.8% higher than the same month a year ago, with the average home now costing £260,358. 

Transactions are hitting all-time highs too, and some estate agents are reportedly charging fees for property viewings. So what is fueling the housing boom? Let’s take a look.

How much have house prices increased?

At the turn of the millennium, the ONS reports the average UK house price stood at £84,620. Five years later, prices hit £150,633, and by 2010, they rose even further to £167,459.

In 2015, prices had again risen, to £190,665.

Fast-forward to 2021, and the average home will now set you back over a quarter of a million pounds.

If you’re looking to get onto the property ladder, house price inflation is bad news as it’s now more difficult than ever to buy a home. This is compounded by the fact wages have only grown a tad over 50% over the past 20 years.

Why are house prices increasing?

There are a number of factors putting upward pressure on house prices. Let’s take a look at three of them.

1. The ‘race for space’

The Covid-19 pandemic has seen many of us re-evaluate our need for space. Much of the demand for housing over the past year or so has been for larger properties and those with gardens.

2. Changing work habits

The pandemic has resulted in many of us working from home full-time. While the long-term economic impact of Covid-19 is unknown, many believe that regular home working is here to stay. With this in mind, people are looking outside of big cities to buy bricks and mortar, which can boost prices, particularly in rural areas.

3. Supply and demand

As the number of new homes has lagged behind UK population growth, this has likely had an impact on the cost of housing too.

Does the government influence house prices?

Over the past few decades, the government has implemented policies to support those wanting to get on the property ladder. Such policies include the Stamp Duty holiday, the Help to Buy: Equity Loan scheme, the Shared Ownership scheme and the introduction of government-backed 5% mortgages

Critics claim that these schemes do little to address the price of housing. Instead, many analysts feel that government intervention simply inflates the market, boosting house prices. 

For example, following the introduction of the Help to Buy scheme, the price of new-build properties rose by up to 21.6% compared to older properties not eligible for the scheme. 

Many also point to the recent Stamp Duty holiday as another factor that has helped boost prices. This is supported by recent data suggesting house prices fell slightly from July to June 2021 – the same month that the holiday began to wind down.

The Shared Ownership scheme has also been criticised for enabling people to buy a stake in properties they could not otherwise have afforded, boosting overall demand.

Also in the firing line are the government-backed 5% mortgages, as many believe they encourage over-borrowing. This can increase demand, placing upward pressure on the cost of housing. 

What other factors influence house prices?

As well as government interventions, other factors that can impact house prices. 

1. Bank of England policy

During Covid-19, the Bank of England lowered its base rate to an all-time low of 0.1% and created £450 billion of new money.

A low base rate makes borrowing cheaper, including mortgages. This means people can borrow more, leading to more people chasing the UK’s limited supply of housing stock.

Meanwhile, the Bank’s extensive bond-buying programme has been cited as a reason behind soaring house prices. This is because increasing the money supply can devalue currency and simultaneously boost asset prices, including property. For more, see our article on whether quantitative easing increases house prices.

2. Buy-to-Let

Years of house price inflation, increasing rents and low interest rates on savings accounts have been given as reasons behind the growing popularity of buy-to-let mortgages, which were introduced in 1996.

Buy-to-let leads to greater competition for properties, which can pit first-time buyers against landlords, boosting demand for property.

3. Planning laws and NIMBYs

Many believe the UK’s restrictive planning laws contribute to high house prices. These strict laws can make it very difficult to get planning permission to build new homes. 

A ‘NIMBY’ (not in my backyard) is a homeowner who opposes housing developments near to where they live. The actions of NIMBYs can have a detrimental impact on supply, further boosting house prices.

Are high house prices a good thing?

There is growing recognition that house prices are unaffordable, which may be fueling the UK’s growing inequality gap.

However, rising high house prices are often welcomed by homeowners and estate agents (due to growing commissions).

For this reason, many believe the government doesn’t have the appetite to support property becoming more affordable, particularly as homeowners are more likely to vote than renters.

For more, see our article on who has benefitted from high house prices.

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