How does the property bubble created by Covid-19 (and subsequent measures, like the Stamp Duty holiday) impact buyers – and what could the future of 2021 hold for anyone wanting to buy a house?
- The 2020 Property Market
- Changes in Property Demands
- The Stamp Duty Holiday
- Impact of the Stamp Duty Holiday Extension
- Changes to the Buy-to-Let Market
- Low Deposit 95% Mortgages
- Is Negative Equity a Real Risk?
- Should You Buy Property Now?
- Other Ways to Invest That Don’t Include Property
Before looking ahead, let’s look at the strange year of 2020. During the first lockdown of March 2020, property viewings and sales were altogether halted. In emergency circumstances, people could still move – but finding a removals company, or an estate agent and solicitor who were as readily and available as pre-lockdown was nigh on impossible.
The first lockdown pushed back many property sales. That meant property chains of several sales fell through more frequently – especially as many businesses made employees redundant in a knee-jerk reaction to the shutdown. Building sites were also (mostly) closed for at least two months – delaying new build properties, impacting many first-time buyers using the Help to Buy scheme.
Three-tier lockdown levels were the next move in the property market. While viewings and sales could now go through, in practice the obstacles were evident. Strict tier-three restrictions significantly slowed viewings and sales – especially as people were not allowed to travel outside of their tier. While, in theory, they could do so for house viewings, the risk of fines and spreading or catching Covid prevented most from doing so.
A boom in post-second lockdown prices happened in conjunction with the introduction of the Stamp Duty Holiday (more on that later). Chancellor Rishi Sunak recognised a stimulus was required to encourage people to start buying again – and the lifting of this tax threshold did do something to encourage buyers (and new sellers) onto the market. Demand rocketed – and so did house prices.
By December 2020, mortgage approvals had reached a 13-year high as national economic recovery seemed bright on the horizon. Lenders worried about furlough pay impacting affordability regained confidence as the economy began to recover overall, too.
But then: a third lockdown! This time, however, the problems of worried buyers and mortgage lenders are significantly less. Estate agents are now confident with remote viewings for those still unwilling to travel – while in-person viewings have reached their pre-lockdown rate. It’s officially a buyers market, with demand higher than ever – and the Stamp Duty holiday has a lot to do with that.
There are, however, additional factors…
A vast majority of the working populace spent at least some time working from home in 2020 and beyond. For many of us, our studio apartments or house shares simply weren’t suited to this kind of work. However, we all did our bit to stay at home wherever possible, and a lot of us enjoyed the flexibility and freedom of remote working. Our limited space, however, meant we weren’t that happy about long-term home working.
As people – and businesses – realised that remote working is a possible approach even after the pandemic is quelled, the property market changed too. More of us want to move from city living. Demand for properties with outside space, an extra room for a home office, and even a garden office rose exponentially in the past year.
More space required
Being stuck inside in city dwellings, at a time when we were limited to half an hour outdoor exercise per day, really brought the need for outside space home for many of us. Even flats with a balcony have risen in price faster than properties without any exterior space, as fresh air becomes a commodity.
Remote working also means less (or no) office work. Some employers have chosen to continue to offer flexible remote working after the pandemic – or have shifted their workforce fully remote permanently. This saves on overheads for the business – but does not take into account both the space and mental wellbeing issues it raises for workers. Stuck in the same studio flat day in, day out, without a distinct difference between work and home can have a huge impact on our mental wellbeing. A separate room is the simplest answer – but this means upsizing.
Combine the need for extra space to work from home, and a garden area, with the house prices in city centres… and you’ve got a problem. However, if there’s one thing 2020 proved, it’s that most office work can be done from anywhere. That means a shift in property demand based on area. More people are moving out to ‘the sticks’, opting for rural or alternative regions that offer more property per pound. What that means now, though, is that rural house prices are rising faster than cities.
One further factor impacting the property market in 2021 is the change in relationships. While some couples moved in faster than usual so they could live out lockdown together, close quarters pushed many more to consider divorce or couples breaking up. This means a new demand for single-person properties or those suited to the restricted budgets of a single parent.
Additionally, the plight of renters was highlighted in the news. Home owners had the ‘luxury’ of a mortgage holiday up to six months, helping provide breathing space for those financially impacted by coronavirus. No such luck for renters. While a ban on evictions was in place, there was no financial support for renters towards their housing costs. This highlighted the instability of living in rented accommodation – and many realised their new priority was to buy a home to remove this instability. Mortgages are, typically, significantly lower to repay each month than rent.
Getting the deposit together is a challenge, though. That’s why the Government announced support for a 95% mortgage scheme (more on that below). It also meant many parents and grandparents were using their own equity to help their adult children get onto the property ladder. A total of £220m was given to adult children by over-55s in 2020 for house deposits.
Lockdown Super Savers
As with any crisis, where some struggle, others profit. Many people turned into accidental lockdown savers – no more nights out, take-out lunches or train tickets for work – meant more cash in our pockets. Add that onto the growth in second jobs for those on furlough from their main job, and some of us managed to save a huge chunk of cash in the last year. This helps push the property market up, as more people who didn’t expect to have a house deposit together so quickly can now apply for mortgages.
The Stamp Duty freeze had the desired impact back in Spring/Summer 2020; the market bounced back as sellers put houses on the market and demand increased.
Normally, you pay Stamp Duty Land Tax on properties sold for over £125,000. The Stamp Duty holiday meant the nil-rate band rose to £500,000 – putting a LOT more properties into the favourable tax-free bracket.
Chancellor Rishi Sunak later extended the initial holiday to June 31st 2021 – with the nil-rate then dropping to properties under £250,000. The original £125,000 rate returns in October 2021.
What this means is that many people could save THOUSANDS of pounds in Stamp Duty fees if they buy a house before July 2021 (or October, if their budget is below £250,000).
House prices rocketed in response to the Stamp Duty holiday announcement. Sellers (and estate agents) realised that demand would surge – and they could take advantage to maximise profit. In fact, house prices rose on average by £13,316 in 2020.
Now there’s an end date to the holiday, it’s almost like we’ve been given a crystal ball: The property bubble is anticipated to burst in October. But, as with anything, it’s not really that simple.
While it may seem that prices will fall once there is no tax incentive for higher-price properties… That’s not necessarily what’s going to happen. We do know – like 2008 – the property bubble MUST burst at some point. It has grown exponentially in the past year and is set to continue through the summer.
It’s more likely the property bubble will pop before October. There are a few reasons for this, including:
The time it takes to process a house sale (several months) pushing people to decide long before the cut-off date
- Changes in mortgage lending confidence
- More people losing their jobs when furlough and Government support ends
- The fear of negative equity kicking in
- The most ‘essential’ house purchases will have already taken place (those motivated by the Stamp Duty holiday)
- Employers refusing remote working and insisting on an office presence
As you can see, this could mean the property bubble bursts as early as the summer. There’s no such thing as a guarantee in the property market – but looking at historical trends, this sudden boom is going to cause a bust at some point. Nobody really knows when!
Uncertainty hangs over the buy-to-let market as much as it does home ownership. High demand and even higher property prices, along with different Stamp Duty rules for second properties, mean it’s not necessarily an investors’ market right now.
Don’t despair. There may be new opportunities on the horizon – such as the changes to permitted development rights making it easier to convert empty shops to residences. The auction market, too, will rise once the main mortgage-based property market crashes.
Secondly, when the property bubble inevitably crashes, that’s your time to shine as an investor. You could snap up property at a more reasonable price, improving your returns as rent rates continue to rise. Property investors have a stronger position than first-time or primary-home buyers as you need to already have a property before you can get a buy-to-let mortgage. You’re also in a stronger position as you’re not putting yourself into a property chain meaning you’re not relying on the sale of your home to fund the purchase of the new one.
As part of the Government’s push to stimulate the property market (and – ideally – prevent the property bubble from totally bursting), 95% mortgages have been introduced. From April 2021, some mortgage lenders will offer mortgages that require just a 5% deposit – compared to the usual 20%.
It’s not restricted to first-time buyers, although the scheme is aimed primarily at them. These new 95% mortgages can be underpinned by a Government guarantee of up to 80% of the mortgage value for 7 years. That means that, should a person with one of these mortgages default, the Government will pay up to 80% of the mortgage. (It doesn’t mean you’d get a cheap home though! Your home is repossessed. The Government covers their 80% guarantee to the lender. The lender retains a 5% risk to ensure they don’t hand out these mortgages willy-nilly. The final 5% is from your deposit).
What this means is that, if you’ve been saving for that all-elusive 20% deposit for your next home, you could already afford it right now. For example, if you’re saving for a £200,000 property, you’d normally need around £40,000 deposit. But with one of these 95% mortgages, you only need £10,000 saved. You’ll still need to pass affordability checks on your credit score, so if you’re still cleaning that up to increase your chances of getting a mortgage, it’s best to wait a few more months. The 95% mortgage scheme will run from April 2021 to December 2022, so you’ve got time.
And remember: the bigger deposit you can save, the lower your mortgage costs overall. So, while a 95% mortgage is a great opportunity in some circumstances, consider about the long-term costs before you opt for one.
One of the reasons very few lenders have yet to sign up to the 95% mortgage scheme is the risk of negative equity.
This happens when you buy a house during a boom time, and the value drops when a property bubble bursts. So, your mortgage could be for £300,000 and your home worth £320,000 when you buy it… but then the property bubble bursts and your home is now worth £280,000 but you still owe a mortgage of £300,000. If you tried to sell the property to finance full repayment of the mortgage, you wouldn’t raise the amount required.
This is negative equity, and it’s something to be wary about when you’re thinking about buying property at a time of boom-or-bust as we’re in now.
However, while lenders are concerned about negative equity in the near future, housing markets will – inevitably – recover and grow in the future. If you’re seeking a long-term investment in a property (such as buying a family home that you intend to stay in for 10+ years), negative equity is less of a worry.
A few factors impact any decision to buying property right now, including:
- The urgency to move – if you HAVE to move, it’s always a good time to buy
- Your financial situation – can you afford to keep renting versus a mortgage?
- Whether your job is secure or you may be at risk of redundancy in the near future
- Alternative investment options you have – is property the best thing for you?
- A speedy sale – if you can push a purchase through before Oct 2021 you save on Stamp Duty
- Your credit record – a poor score means no mortgage
- You have long-term plans to stay in the property
If you have a good deposit saved up, a strong credit score, and need to move soon, buying now is worth it. In fact, if you need to move – such as relocating for work – buying property is always worth it, even during a property bubble as we’re in. Property prices, like any investment, go up and down. Buying a house for reasons other than investing means it’s always a good time to buy – but you will face a risk if you plan to move within a few years.
When to wait
For those still saving their deposit and in no urgent need to move, staying put is the option to suit most people. You can continue to save a larger deposit (thus reducing your overall mortgage and interest payments), wait for prices to stabilise or reduce, and then find a property you like. It’s also a good time to improve your credit score – that’ll increase your chances of getting a mortgage at a great rate.
Buy-to-let investors have to weigh up both sides. Buy now, and take advantage of increased demand for certain types of property (two- and three-bedroom with gardens). Or, wait until prices drop to snap up a bargain. It depends on your immediate need to invest and how long you intend to keep the property. The longer it’s in your portfolio, the greater returns and less risk of negative equity or low returns.
The property bubble makes investing in housing a risky venture right now. Other investments could be a better option – but what’s available? Check out these articles to learn more about investing to grow your wealth.