Analysis Of The Week: The Housing Price Frenzy​


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By Alison Catchpole​


The Story

Property prices have been experiencing a “market frenzy” worldwide (Bloomberg).

“British house prices rose by 10.9% in May compared with the same month last year” (Reuters), according to data from mortgage lender Nationwide - the biggest annual increase in nearly seven years.

The Bank of England is carefully monitoring the housing market to keep an eye on inflation rates, with the possibility that a rapid recovery from the COVID-19 pandemic could lead to sustained pressure, if demand overtakes supply. The March 2021 UK budget cemented a government commitment to backing 95% mortgages, although most of these are not on new builds, due to concerns around a negative equity trap, should these prices fall (Shoosmiths).

The Background

House prices are determined by a number of factors, including the overall health of the economy, interest rates, and supply and demand.

After the 2008 financial crisis, the UK government introduced a series of incentives aimed at encouraging first time buyers. By 2018, first-time buyers had recovered their pre-crisis levels of purchasing (Reuters). But now the balance has been skewed towards home movers, whose housing equity enjoyed uninterrupted growth for over a decade.

Mortgage completions by home movers in the first quarter are up by 82%, overtaking first time buyers as the ‘race for space’ and a Stamp Duty Land Tax ‘holiday’ drive the UK housing market (Financial Times).

Reuters reports that a property bubble* is a risk in cities including Munich, Frankfurt, Amsterdam, Paris and Zurich. Fiscal stimuli and other initiatives have stoked a property boom across the globe, but several countries - including New Zealand and China - are taking steps to rein in development.

*Put simply, a property bubble is a period of rising house prices, often driven by excessive demand (compared to supply) and speculation. Prices, therefore, rise far higher than the underlying fundamentals.


What It Means For Businesses And Law Firms

As businesses adapt, working from home (WFH) as ‘the new normal’ has highlighted the need for space, particularly with home offices in high demand. In the UK, house prices are booming – but mainly outside London (Rightmove; Reuters). Foxtons Estate Agency is targeting the lettings market. In a recent dossier, activist investor Catilist, which owns a 2% stake in Foxtons, said that in pushing out of London, the agency could become a £1 billion business (Financial Times).

A surge in demand for rural and suburban housing in the southeast has now extended to northern areas, and many law firms will be supporting conveyancing transactions. Construction activity is also up, with house building the best performing category of construction activity in May, followed by commercial work (Financial Times).

Talking to the BBC, Bank of England Deputy Sir Jon Cunliffe said the Bank's main concern was rising personal debt, particularly in the light of the financial crisis. "We learned from experience that if households are carrying high levels of debt, and you then hit a bump, the recession is much worse" he said.