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It is fair to say that most people did not expect us to be in this position in the summer of 2021.

This was the time when the end of both the stamp duty cut and the furlough scheme was going to bear down on house prices and transactions.

Neither, however, have ended, though the full stamp duty reduction has only days left, June 30 marking the switch to a three-month period in which, in England, the exemption will only apply on the first £250,000.

Alan Boswell – MPU

Now the big question is whether, as stamp duty returns to normal levels, the market will lose steam.

The majority view is that this will indeed be the case, and that the roaring market of the first half of the year will give way to a merely purring one later in the year.

That the market is booming is not in doubt.

The latest e.surv/Acadata house price index, for May, showed a spectacular 13.4% annual rise in prices in England and Wales, or 17.1% excluding London and the South East.

The hotspots are the North West, up 18.4% in the latest three months compared with a year earlier, and Yorkshire & the Humber, up 17.1%.

Some people in important places think, however, that the boom has plenty of legs.

Andy Haldane, the Bank of England’s chief economist, who will soon be leaving the Bank, attracted attention for his comment that the housing market is “on fire”.

Alongside that comment, however, he said that while the tax cut had boosted the market, more fundamental factors were at work.

There was, he noted, “a significant imbalance” between demand and supply. This, by implication, could persist.

That, it appears, is the way the Bank is thinking.

Sir Jon Cunliffe, a deputy governor of the Bank, in a recent speech described the “quiet decade” for house prices between the financial crisis and the pandemic when, in rough terms, they rose roughly in line with incomes.

He contrasted that with the period since the pandemic struck. Since then, as everybody knows, prices have increased very sharply.

Cunliffe asked the question of whether the recent strong rise in prices, which carries echoes of the period leading up to the financial crisis, is just an aberration. Have temporary factors boosted prices, in other words, so that we will revert to something like the quiet decade, or has something more fundamental changed?

As he put it, while there may be some reasons to expect a cooling of the market when the tax incentive is removed:

“There may also be some reasons to believe that the recent increase in demand for housing, and perhaps the composition of that demand, which has driven the UK market in recent months reflects some more persistent drivers and that the market will not fall back to its pre-pandemic decade performance when the incentives are gone.”

A survey conducted by Nationwide in April found that, amongst homeowners moving or considering a move as a result of the pandemic, three-quarters of them said they would still be moving or considering a move even if the stamp duty holiday hadn’t been extended. Moreover the stamp duty holiday in Scotland has already come to an end with no material drop-off in demand.

The Scottish point was well made.

The latest RICS’ residential market survey, from the Royal Institution of Chartered Surveyors, showed the market in Scotland remaining “buoyant” and “outperforming previous years” according to agents. Price expectations remained very strong, with a balance of more than 60 per cent of surveyors expecting prices to continue rising over the next three months.

What does the Bank of England do if the market remains too strong for what it would regard as comfortable?

Most of the discussion on this tends to focus on the big macroeconomic weapons it has as its disposal, raising interest rates or reducing QE (quantitative easing).

But decisions on these would not be driven by the housing market alone.

Cunliffe provided a reminder that the Bank has other tools at its disposal, and that they could begin to rein back the market.

Under powers it was granted by the Treasury in 2014, its financial policy committee (FPC) can place limits on mortgage lending, with reference to loan-to-value ratios and debt-to-income ratios, including interest coverage ratios in respect of buy to let lending.

Those constraints could come into play.

As he commented:

“If the self-reinforcing dynamics of past periods begin to re-emerge – strong demand, fast growth of prices relative to incomes, easy credit conditions and high levels of transactions – the FPC’s measures would certainly begin to have a stronger impact in constraining the increase in aggregate mortgage indebtedness.”

“But that, of course, is what they are intended to do.”

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David Smith
David Smith has been Economics Editor of The Sunday Times since 1989. He is also chief leader-writer, assistant editor and policy adviser. David is the author of several books, including Free Lunch: Easily Digestible Economics; and Something Will Turn Up: Britain’s Economy Past, Present and Future. He is a visiting professor at Cardiff and Nottingham Universities and has won a number of awards including the Harold Wincott Senior Financial Journalist of the Year Award, the 2013 Economics Commentator of the Year Award and the 2014 Business Journalist of the Year Award in the London Press Awards.

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