Valuation

04 January 2021

2020 surprised us all with property prices ending the year mostly in positive territory. Zoopla figures showed that November 2020 saw the highest average annual increase of 3.9%. Given the pandemic, what’s behind the price increases , have all properties increased in value and what does 2021 hold?

Starting with ‘have all properties increased in value’ the answer is no and this links in with the factors of the increased activity and prices.  Detached homes beat the average increase, rising by 6.7% in the year to November 2020 (BBC report, 18/11/2020) and this was driven by buyers needing more space, with working from home becoming a more permanent feature, and flight from the cities to ‘down-price’ (or to get more home for your money) as paying a premium for a shorter commute becomes less necessary in the ‘new normal’.  We certainly saw more local demand from London and Surrey commuter belt buyers in the second half of 2020.

Not all properties benefitted though.  Access to credit was constrained for those with less than a 15% deposit. This disproportionately affected first time buyers, as did the economic fallout from Covid with this generation more likely to see job losses.  First time buyers disproportionately purchase leasehold property and this is where we saw local price drops through reduced demand so it was a tale of two markets in 2020.

More lenders are opening up to 10% deposits and this could make it a good time for first time buyers and landlords to make purchases as prices are low.

The obvious support mechanism for house price was the stamp duty holiday, so will reversing this on 01 April 2021 harm prices?

The optimist in me feels that the Government will extend the stamp duty holiday, or at least water down the normalising of rates.  The Government clearly needs more taxes but this holiday has led to a surge in sales and supported many jobs in the direct and indirect property industry, adding to the coffers via corporation tax, national insurances and income taxes.  It’s not just estate agents, solicitors, mortgage advisers and surveyors who benefit.  Think of the countless trades, removals and DIY and furniture expenditure associated with moving.  Eliminating the stamp duty holiday may be negative to the overall government tax take with less transactions, associated employment and money spent.

The behavioural aspect also needs to be considered as in a democracy a government needs to remain popular and no matter what side of the political spectrum you lie, it’s hard to argue that the incumbents are particularly popular with botched decisions and leadership (albeit under trying circumstances).  This is one area of successful policy but sentiment could turn against them if many miss out because of solicitor and lender induced delays (both professions have had to adapt to new working environments in conjunction with unexpected levels of demand) and s I would be surprised if we don’t see something supportive in regard to the stamp duty holiday cliff-edge, which would support prices.

Souring sentiment is the obvious economic headwinds that Covid has caused, but in dealing with this, the Government may be further supporting house prices and this is though the supply and velocity of money and inflation.

The financial crash of 2008/09 saw money printing but this ended up with banks.  This time round, the printed money is ending up in back pockets and with businesses.  Expenses have crashed with us unable to holiday, eat out, entertain, commute or shop.  Interest rates have dropped and this excess and spare cash needs to find a proverbial home.  This may also become a longer term trend as people see the value of investing in their homes rather than commuting and spending, all supportive of house prices.

2020 also saw Government borrowing and debt shoot up to 99.5% of gross domestic product, a level not seen since the early 1960’s.  When currencies are debased like this, assets can perform favourably, so not so much rising house prices but the value of the currency used dropping.

In dealing with this debt, the government has 3 options; reduce expenditure (unpopular), raise taxes (unpopular) or attempt to inflate the debt away which would further debase the currency and be supportive of notionally rising house prices.

Just a 2020 took the industry by surprise, I feel the ingredients are there to continue house price growth in 2021, albeit potentially at a lower pace.

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