Defying many predictions, the UK house price index hit a record high during August. According to Nationwide, annual house price growth in the UK accelerated from 10.5% to 11.0%, during the month. Between July and August prices rose 2.1%, one of the highest monthly increases in over a decade. It’s disappointing news if you’re a first-time buyer.
Here I take a look at the reasons why house prices have surprised the experts, why they are continuing to rise and why they might increase further in the near future.
Soaring house prices a surprise
Many experts expected house prices to fall after the end of the Stamp Duty holiday in July for houses worth over £250,000, but instead the house price index continued to rise.
Joshua Raymond, director at financial brokerage XTB, commented that rising prices during August are, “a bit of a surprise given the wider belief that there was likely to be a short-term cooling-off period after the expiration of the stamp duty relief in June.” The anticipated cooling off in house prices hasn’t happened.
Why is the house price index still rising?
So why have the experts been proved wrong? It’s because there is huge upward pressure on the UK house price index due to underlying long-term factors.
Increased home-working during Covid has encouraged more people to move house for additional space. Also, historically low interest rates have fuelled demand as bigger mortgages are more affordable. But the supply of UK houses is limited as there is a long-term housing shortage. Simply put, there are not enough UK houses for the number of buyers. This forces prices up.
On top of these long-term factors, XTB reports that there was also short-term pressure on house prices during the summer. During August, demand increased for cheaper properties as homes worth less than £250,000 still enjoy stamp duty relief until the end of September.
As well as this increased demand, there was a lack of available houses as many homeowners sold early to take advantage of stamp duty relief during June. This meant that more people were competing to buy fewer homes, pushing up prices.
Will the house price index continue to rise?
Experts are still unsure whether the house price index will continue to soar or whether there will now be a cooling-off period. It’s possible that house prices might fall back a little when Stamp Duty thresholds return to normal at the end of September.
However, the economics of supply and demand mean that house prices are unlikely to fall significantly until there are more houses available. And the UK’s chronic housing shortage looks set to continue for the foreseeable future.
Are there any exceptions?
It’s true that house prices are not rising everywhere at the same rate. A Halifax report shows that prices in Greater London have risen much more slowly than in many parts of the country, increasing only 1.3% during August. This reflects people’s desire to move out of London for more space as home working becomes more common.
However, it doesn’t mean that London house prices are affordable. London properties are still extremely expensive, averaging £508,000, it’s just that other areas are starting to catch up.
Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.