With the end of the stamp duty holiday looming, Capital Economics has predicted that property prices could rise by as much as a whopping 20%, putting a downward pressure on inflation.
Property Economist at Capital Economics, Andrew Wishart, said the “extension to the stamp duty holiday has given house prices renewed impetus”.
Halifax’s latest index revealed prices rose by 9.5% annually in May, while Nationwide claimed house price inflation has hit double figures at 10.9%.
Andrew Wishart added that, “High sales volumes and limited stock suggest that house price inflation could reach 20 per cent, but a drop in sales after the stamp duty holiday should ease the upward pressure,” Wishart added.
First Time Buyer Demand Will Replace Home Mover Demand
In the first quarter of 2021, the report estimated that approximately 160,000, existing property owners moved home; twice the volume recorded over the past ten years. A marked reduction of sale instructions in May is a clear indication of the slowing down of demand, largely due to the stamp duty holiday coming to an end.
The report suggested that, although mortgage lending was at its highest since 2007, another reason for growth in the property market was due to cash buyers, with high annual house price growth being a result of the combination of the two, rather than just based on mortgage sales.
It is predicted that when the stamp duty holiday and other cash buyer incentives come to an end, the demand will shift to first-time buyers, due to low deposit and bad credit mortgages becoming available. High LTV mortgage offers will inevitably lead to house price increases in the short term, whilst bolstering the supply-demand imbalance.
Capital Economics report predicted that property supply will remain “vey limited relative to demand”, with increasing competition for available properties.
Wishart added: “That imbalance between supply and demand means that estate agents now have just five months of stock on the books at the current rate of sales, the lowest since 2002.
“While the market is tighter than usual in all regions there is considerably more stock available in London than elsewhere, reflecting both how the pandemic has affected location preferences and already stretched affordability in the capital.”
The End of the Stamp Duty Holiday
With a reference to the Royal Institute of Chartered Surveyors index, the report said that respondents were not expecting a drop in sales in the next few months, even with the stamp duty holiday coming to an end. Despite this, the market is predicted to slow down over the next 12 months.
Andrew Wishart said that the tapering, starting on July 1st, will have a negative effect on property sales, particularly in London, due to the tax break incentive no longer being available. The report however shows that property sales outside of London are expected to fair better with sales continuing to be “resilient”.
Bank of England 3 Year Interest Rate Hold
With the possibility of inflation rising above the Bank of England’s target of 2.9%, it is predicted that the Bank of England may choose to hold mortgage interest rates for three years.
Wishart commented, “However, so long as above-target inflation is temporary, we think that the Bank of England will keep interest rates on hold for the next three years”.