House prices bounce back, as the caffeinated flea effect returns

Sarah Coles, personal finance analyst at Hargreaves Lansdown, comments on the publication of the ONS house price data for August, which suggests house prices bounce back, as the caffeinated flea effect returns with no expectation of imminent price drops, even when rates rise.

Key points from ONS data:

• Average house prices were up 10.6% in a year to August, up from 8.5% a month earlier.
• The average house price was £264,000, only £1,000 off record June prices. Average prices are up £25,000 in a year.
• House prices in London were still the highest in the UK, at£526,000, which is the highest on record.
• Prices in the North-East saw the highest annual growth at 13.3%, while London saw the lowest annual growth of 7.5%.
• However, prices in London jumped in August, because annual growth in July was just 2.9%.
• Prices in the North-East remain the lowest in the country, at an average of £149,000.

Sarah Coles said:

“House prices bounced back close to their record highs in August, after a small dip in July. The caffeinated flea effect is the inevitable consequence of chopping and changing stamp duty rules. However, when these fall out of the figures, there’s every sign that prices will remain resilient – even after interest rates rise.

“Most of the value of the stamp duty holiday was lost at the end of June, so we saw a big surge in average prices in June as people rushed for the deadline and pushed prices up. After this passed, the market took a breath, and prices dropped back slightly in July. Then, in August, the final stamp duty holiday deadline started exerting an influence. And while people could save far less at this point, there was still the psychological effect of the final deadline at the end of September urging them on. Price rises bounced back in August, and there’s every sign they’ll remain strong in September too.

“The big question is what’s going to happen if interest rates rise. Predicting the future of rates is notoriously difficult, but the market is expecting a rise this side of Christmas, and this has already been enough to push up swap rates and see rock bottom mortgage rates rise. The last two weeks has seen the number of deals priced under 1% drop from 131 to 116. 

“Fortunately for homeowners, even with pricier mortgages, there are strong signs that the banks aren’t expecting this to tip over into price falls.

“The banks are currently prepared to increase their exposure to risk in a way they would be wary of, if they thought prices would fall. So, for example, HSBC has increased limits on how much wealthy buyers can borrow. Those with incomes of £75,000 or more can now borrow five and a half times their income – up from five times – and there’s every chance other banks will follow suit. 

“Likewise, the Bank of England Credit Conditions survey last week showed that banks were increasingly willing to lend in the three months to September, particularly to those with less equity in their homes. They expected to make borrowing even easier towards the end of the year. When asked what affected their decision, while better economic conditions dominated, they were also positive about the future of house prices.

“The immediate prospects for the property market aren’t tied so directly to the Bank of England base rate as they once were, partly because most mortgages are currently fixed over two or five years. Those who are locked into rock bottom rates are protected from rate rises for a significant period. Those who have deals coming to an end within the next six months can arrange a new fixed rate right now, which will kick in immediately after their deal expires.

“And while rate rises will be unwelcome, and will eventually feed into higher mortgage payments over the coming years, as yet, rate rises are being predicted at relatively modest levels, so there will still be deals available at historically affordable rates. So while we may see some of the heat come out of the market, we’re not currently expecting prices to fall.”

Kindly shared by Hargreaves Lansdown

Main photo courtesy of Pixabay