Capital Economics has suggested the average mortgage rate will fall to 1.6 per cent by the end of next year. 

Average mortgage rates sat around 2.1 per cent from 2017 to 2019 the firm said, before dropping to 1.85 per cent in July this year as lenders’ risk appetite improved. 

At Mortgage Solutions’ British Mortgage and Protection Senate last week, Yorkshire Building Society’s chief executive Mike Regnier also suggested rates would remain low due to excess liquidity in the market. 

Additionally, the Bank of England is expected to keep the base rate at its current record low of 0.1 per cent until 2023 which will support cheaper lending.

Capital Economics said this coupled with a lack of supply would keep property prices high. 

The number of second hand homes on the market is close to its lowest level on record and declining seller instructions recorded by the Royal Institution of Chartered Surveyors (RICS) indicated a slowdown in new listings.  

In June, Propertymark NAEA warned that the average stock per each estate agency branch was at a 19-year low. 

The firm also pointed to annual house price growth in other countries such as Germany, the Netherlands, Denmark and the US where respective increases of nine per cent, 11 per cent, 15 per cent and 18 per cent have been seen. 

Within the UK, increased household savings and continued home working could also influence moves providing an additional boost to house price growth. 

As a result Capital Economics revised its forecast for house price growth for next year up from 3.5 per cent to five per cent. 

Andrew Wishart, property economist at Capital Economics, said: “The end of the stamp duty holiday may do little to dampen demand and homes for sale are in short supply.  

“Overall, tight supply and robust demand mean that house prices will retain their momentum, so the consensus forecast that house prices will rise by 3.5 per cent in 2022 now looks too pessimistic.” 

The availability of the cheaper mortgage deals is driving demand, against a backdrop of limited supply. Overall, annual growth is returning to more normal levels, following months of double-digit increases.

House prices will increase by 0.7 per cent over September to November based on deals agreed this summer, with low mortgage rates and new flexible working arrangements continuing to drive demand over the longer term.

According to Reallymoving’s data, conveyancing quote volumes returned to normal levels for the time of year in July and remained unchanged in August, further indicating that buyer demand is settling back down.

House prices will dip

The market will see a marginal dip of 0.5 per cent in September as a result of deals agreed in June, when buyers were forced to factor in the cost of paying stamp duty once again, constraining budgets.

However, this decline will be short-lived with prices agreed between buyers and seller rising again once the final stamp duty holiday deadline has passed. This is likely to be in part due to limited supply of new properties coming onto the market creating greater competition for homes.

When those deals complete in October, prices will rise by 1.3 per cent, before flattening out to a 0.1 per cent decline in November when the average house price will be £341,492.

Rob Houghton (pictured) CEO of Reallymoving, said: “The rate of house price increases over the last year has been remarkable but it’s been a difficult period for first-time buyers and we welcome a return to more stable levels of growth. The housing market is in good shape heading into the autumn as the impact of the stamp duty holiday works its way out of the system, demand returns to more normal levels and once again the market proves its underlying resilience.

“Competition among cash-rich mortgage lenders has reduced borrowing costs to record lows, alongside a strong economic recovery and jobs market – all of which are boosting consumer confidence and prompting people to make their move now and take advantage of five-year fixed rate deals available at less than one per cent.

“While interest rates stay low and supply remains constrained, despite monthly fluctuations the overall market trend will be steadily upwards.”

However, if you make a comparison between Nationwide and Halifax or the Office for National Statistics (ONS) data, then you can see a significant difference in values, which even now makes the former look out of balance with the latter two. 

So, while both Halifax and ONS have average UK house price values well above £260,000, Nationwide’s most recent index for August – even with close to a £5,000 increase over the month – shows its average at just below £249,000. 

Which means that, while it was a significant monthly rise of 2.1 per cent, it is still some way behind those other two, and specifically the ONS data which covers all purchase transactions not just those which involved either Nationwide or Halifax. 

Prices and costs on the rise 

But what does this mean? Well, it means that the fundamentals in the UK housing market remain demand-heavy. Even with the government recently setting out its belief that it can deliver 120,000 new homes in the ‘affordable’ bracket over the next decade and reach 300,000 new homes per year in the mid-2020s, supply is still likely to lag behind. 

The cost of building those new homes is not coming down either.  

If anything, the price of construction is only going to rise, again based on shortages of timber, concrete, bricks and the like. That increased cost will be added to the house prices which will need to be paid by the consumer.  

All this and other societal demographics including household increases, means prices are only likely to continue moving in one direction, albeit not necessarily at the kind of pace we have seen over the last 12 months or so.  

Incomes not catching up 

Whether income levels can in anyway bridge some of that gap remains to be seen. Let’s be honest here, incomes have lagged behind house price increases for many, many years and the chances of us seeing double-digit wage hikes seem utterly fanciful. 

It leaves both potential first-time buyers and the lenders that service them with a quandary.  

This is in terms of finding the money for deposit, the ongoing incomes to meet mortgage payments, the funding to provide high loan to value (LTV) mortgages, and the appetite to keep on doing this for many decades to come. 

For each side of that equation – and the advisers in the middle advising them – this is going to be a long-term commitment.  

Perhaps longer than it has ever been, in terms of the length of terms for mortgage borrowers and lending commitments to ensuring high LTV mortgage choice does not simply wither on the vine when the government withdraws its guarantee scheme; which has undoubtedly acted as a catalyst for the market. 

Lenders must act 

The only way we can ensure that strong numbers of first-time buyers move into their homes is via an approach which recognises that a five per cent deposit might be the best that many would-be borrowers can hope for. It will still mean many thousands of pounds must be saved and borrowers may also require 30, 35 or 40-year terms at this level to make them affordable.  

But questions remain over whether lenders can match this up with product choice, they have the appetite for that risk and how the regulator looks at their requirements for capital to support lenders offering higher LTV products more widely.

The positive here is that prices continue to show no signs of dropping back anytime soon.  

That should give lenders a greater degree of confidence in the risk they are taking on and should also ensure that – for those first-timers who can buy – they will have an appreciating asset to work with in the future. 

Research by Comparethemarket.com analysed data from the Office for National Statistics (ONS) from 1992 to 2002 and predicted the UK average house will cost £323,718 by 2031.  

In London, it is expected this could rise by a third to an average of £619,568. 

This will push the average age for first-time buyers up to 35 in England and 37 in London, which is up to two years older than the age of a typical new homeowner currently. 

Comparethemarket.com also surveyed homeowners who had purchased in the last decade, to see if they would change anything if they were to buy a home today. 

Most of the 1,000 respondents would still purchase with a partner, with 47 per cent having done so in the past and half saying they would buy with a partner again today. 

Respondents would be less likely to seek financial help, with nine per cent saying they would need the support today. This is compared to the 13 per cent who turned to family or friends when purchasing within the last decade. 

When purchasing within the last decade, first-time buyers who did receive help were given an average of £8,635.14. If they were to purchase again today, respondents would need a little less on average at £8,346.15. 

Chris King, head of home insurance at Comparethemarket.com, said: “Despite house prices seeing an all-time high and the average age of first-time buyers set to increase over the next 10 years, it’s interesting to see that buying habits have remained similar.”  

Sundeep Patel, director of sales at Together, said many of the specialist lender’s customers were using products with terms between six and 12 months to “quickly buy, refurbish and then sell on” to cash buyers or those with a standard mortgage agreement. 

He said: “We’ve seen a rise in these types of customers approaching us for bridging finance to refurbish properties during the last year, as they take advantage of rising prices and a red-hot property market.” 

House prices in the UK have reached record highs this year with increases in the double digits. 

The latest index from Nationwide showed prices had risen by 11 per cent annually in August to an average of £248,857. 

Changes to permitted development rights have also enabled house flipping as it gives investors the ability to convert a wider scope of non-residential properties for residential use, as long as they meet government space standards. 

Patel said this change had “streamlined the planning process, making it easier for them to be developed into modern homes for people to live in.” 

Jo Breedan, managing director of Crystal Specialist Finance, said this could also offer a higher return than renovating a rundown residential property. 

He added: “In terms of floorspace coverage, a commercial residence is typically about 30 per cent smaller than its residential equivalent. So [investors are] getting a discount there anyway.  

“They get the planning permission, do the conversion and these guys are making a 20 per cent profit in that sort of transaction.” 

Breedan said as long as financing and renovation costs were covered by the profit, investors were making a higher return on the average house prices increases of up to 11 per cent. 

The broker firm saw much of this flipping activity between January and June, Breedan said, with this tailing off recently. However, he expected business to pick back up again after October when the holiday season ends. 

He suspected this would not be down to any savings to be had during the last phase of the stamp duty holiday but rather “people needing a break and trepidation about whether we’re going to be in another lockdown by the end of the year”. 

Breedan said short-term house flipping was not new, but instead of going for super prime properties like usual, “anything below £2m is fair game”. 

He said the clients he was seeing were typically more experienced and knowledgeable, giving them the advantage of not being held up by any delays in the construction sector or caught out by mortgage and planning breaches. 

“These guys tend to have a great broker, architects, builders who can deliver within a certain timeframe. They have a professional team behind them and a brilliant tax adviser so they know what they can and can’t offset,” Breedan added. 

The long game 

Chris Oatway, owner and director of LDNfinance, said his firm had actually seen less house flipping activity at his firm this year.

While a number of experienced, small developers have taken advantage of distressed assets being sold below market value, increased product choice and flexibility has provided more opportunities. 

Instead, developers are holding on to assets and using the increased equity to finance other projects, Oatway suggested. 

He added: “Buy, develop and hold is the standard process now and only certain assets where exceptional profit levels have been hit result in the asset being sold.  

“The stamp duty holiday reduced the costs of buying which may have encouraged investors to flip, but from what we have seen this has also meant there is more equity in the project which allows them to keep them in their portfolio and still be able to move on to another project.” 

Economic research firm Capital Economics’ housing market outlook said “robust demand” for property would limit any sharp drop in transactions in Q4 once the tax break goes completely. 

Transactions reached a record high of 198,000 in June coinciding with the end of the first stage of stamp duty holiday, which allowed a tax break on up to £500,000 of a property purchase. The transaction level was significantly above the pre-pandemic norm of 100,000 a month. 

Activity wound down in July when the threshold for the stamp duty holiday fell to £250,000. The latest data from HMRC showed there were 73,740 transactions during the month. 

Sales instructions fell more sharply, Capital Economics said, indicating that the surge in home moving was subsiding. Data from the Royal Institution of Chartered Surveyors (RICS) showed this dropped from a net balance of -1 per cent to -23 per cent in July. 

A lack of second hand stock will underpin demand and prevent house prices from crashing, Capital Economics said. Conversely, the firm said this suggested “house prices will rise further in the near term”. 

This will also drive demand towards new-build homes. 

The firm added: “Even when comparing to June 2020, which saw reservations leap after the housing market reopened, homebuilders report that demand took a further step up this June.” 

Capital Economics also predicted the ending of furlough and the repossessions ban would have little impact on the housing market. It said this was evident in the recovery of mortgage repayments and the fact that few mortgage holidays were still in place.  

“Despite that, arrears have not risen,” the report stated. 

It also pointed to economic indicators which showed the economy was almost back to its pre-virus size. 

GDP rose by one per cent month-on-month in June, which was 2.2 per cent below its pre-Covid-19 level.

Additionally, the firm said the dip in CPI from 2.5 per cent in June to two per cent in in July would not last long and predicted it would rise to four per cent by December.  

However, it said the Bank of England likely would not increase the base rate until 2023 “so long as higher inflation doesn’t become entrenched in expectations or underlying wage growth”.

That’s over a 10 per cent increase in 12 months when back in July 2020 the annual increase was 1.5 per cent. I suspect, in particular, first-time buyers were hoping that a prolonged period of stability might allow their incomes to catch up with house prices and they could save for their deposits in a far quicker timescale. 

Since then we have, what can only be described, as a frenetic market, fuelled by lockdown demand, pushed ever higher by stamp duty holidays, and still hampered by a severe lack of new housing supply. 

It is therefore no wonder that a recent residential market prediction from Savills suggested first-time buyers will increasingly need to be supported by a mixture of both government and parental support, with perhaps the latter taking most of the heavy lifting. 

I say this because, even with the government’s mortgage guarantee scheme having acted as a much-needed catalyst for the provision of 95 per cent loan to value (LTV) mortgages, we are still some ways short of the product numbers available pre-pandemic.  

And of course, with prices having moved into double-digit-increase territory, the amount of deposit required has moved significantly upwards. 

Higher deposits needed 

Where do you turn to if you don’t have that parental support? A year ago, your five per cent deposit for an average house would have been over £10,100 less than it is today, but then again, there were only a handful of five per cent deposit mortgages available and they all required some sort of parental, family or guarantor help. 

Yes, now we have more 95 per cent LTV loans but the deposit requirements are larger. And, let’s not forget, the housing market is much more competitive than it might have been without the government’s stamp duty holiday initiative. 

Strong competition  

The competition for homes has gone up significantly and those with larger amounts of deposit and equity are going to be much more in the box seat than those who can muster a five per cent deposit.  

Plus, of course, you will need a mortgage worth £20,000 more and the costs of funding a mortgage at this level are far in advance of what those with larger equity levels or deposit monies will have to pay. 

Again, rates are coming down, but there is still a considerable gap between 60-75 per cent LTV mortgage products and those at the 95 per cent LTV level.  

Looking ahead 

What happens next therefore is important.  

The Savills report suggests the government mortgage guarantee scheme could help 50,000 borrowers into a first property if it was as successful as the previous iteration of the scheme which ran between 2013 and 2017. 

However, this version is due to finish at the end of 2022, and unless the government of the day agrees to extend, we might not believe it is achievable to hit the same numbers within 21 months as we did between four years. 

We should also not forget that the Help to Buy scheme – now only available to first-timers – is also due to finish in 2023 and that delivers 40,000 purchases per year.  

What is going to fill that gap? And that’s without addressing the need for sustainable affordable homes, particularly for those who don’t have access to the Bank of Mum & Dad. 

Again, I can’t help but find myself hoping for some sort of five, 10 or 20-year plan for housing in this country, and a focus from government on working with developers and lenders and all stakeholders to deliver joined-up thinking, especially when it comes to helping first-timers onto the ladder.  

That hope might seem naïve, but it may be the only way to get a plan which can keep delivering year after year, otherwise both prices and homes may well remain out of reach for all but those with the most affluent parents or grandparents. 

This was a change from the 0.7 per cent monthly growth recorded in June, according to the Nationwide house price index. 

Annual price growth remained in the double figures at 10.5 per cent, but this was down from a yearly increase of 13.4 per cent the month before. 

Stamp duty holiday not a major motivator 

While transactions in June reached a record high of nearly 200,000 due to the end of the first phase of the stamp duty holiday, this was not the main driver for purchase activity, Nationwide said.

A survey conducted by the mutual found a quarter of homeowners were either in the process of moving or considering it because of the pandemic. Three-quarters of those said they would have done so even without the stamp duty holiday extension. 

Robert Gardner, chief economist at Nationwide, said demand would remain solid in the near term. 

“Consumer confidence has rebounded in recent months while borrowing costs remain low. This, combined with a lack of supply on the market, suggests continued support for house prices. But, as we look toward the end of the year, the outlook is harder to foresee.  

“Activity will almost inevitably soften for a period after the stamp duty holiday expires at the end of September, given the incentive for people to bring forward their purchases to avoid the additional tax,” he said.  

Gardner added: “Nevertheless, underlying demand is likely to soften around the turn of the year if unemployment rises, as most analysts expect, as government support schemes wind down.  

“But even this is far from assured. Even if the labour market does weaken, there is also scope for shifts in housing preferences as a result of the pandemic to continue to support activity for some time yet.” 

Price crash avoided

Property prices declining in June was a sign of the market cooling off after six months of frenetic activity, industry figures said. 

However, a lack of housing stock and first-time buyers coming back into the market will sustain demand and prevent significant drops in house prices. 

Robert Payne, co-founder of Langley House Mortgages, said: “The first half of July was noticeably quieter, but this happens every year as families prepare for the schools to break up, and then you had the Euros on top.  

“The level of enquiries we’ve been getting has actually increased significantly since then, predominantly among first-time buyers who are finally getting a look in now that the competition has reduced.” 

Imran Hussain, director of Harmony Financial Services, added: “The market in July was as busy as ever and with the unprecedented lack of stock, don’t expect prices to fall.  

“I can’t see price growth continuing at its recent rate in the second half of the year due to the first phase of the stamp duty holiday ending, but the sheer number of first-time buyers will keep prices ticking along comfortably.” 

Conveyancing comparison website Reallymoving analysed the quotes it receives alongside data from Land Registry, and predicted September will record a -0.1 per cent decline in average house prices. 

Before this happens, house prices in England and Wales will rise in July, with a 3.8 per cent month-on-month increase. This is based on deals agreed in June which missed the initial stamp duty holiday deadline. 

Prices will then decline to 0.4 per cent growth in August. 

Annual growth is also set to fall to 6.3 per cent in September, ending the run of double-digit price hikes. 

Buyer demand will also wind down as the website recorded a decline in the volume of conveyancing quotes, which decreased by 13 per cent and 18 per cent in May and June respectively. 

Rob Houghton, CEO of Reallymoving, said: “A slowdown in the remarkable rate of growth we’ve seen over the last few months was inevitable and looking ahead over the next three months, the data indicates that the market is softening which will be reflected in completed sales data heading into the autumn.  

“With the influence of the stamp duty holiday now largely expired alongside early signs that buyer demand is returning to more normal levels, we can expect prices to follow suit and return to a more stable trajectory.”  

“Despite this period of readjustment, we believe the market will continue to perform well over the longer term.  

“There will be a contingent of buyers who realised pretty quickly that rising prices were wiping out any tax savings and decided to hold off until the market cooled, who, along with first-time buyers who largely didn’t benefit from the stamp duty saving, may decide to make their move later this year,” he added. 

The increase from April to May was 0.9 per cent. 

Of the 13 regions covered by the Office for National Statistics (ONS) figures, the biggest price increases were in the North West at 15.2 per cent, Wales with 13.3 per cent and Scotland, 12.1 per cent.

The lowest average price growth was in London at 5.2 per cent, then Northern Ireland at 6.0 per cent and East of England, 6.9 per cent.

First-time buyers paid 9.5 per cent more over the year and 0.7 per cent more month-on-month, with the average price £213,336.

For a former owner occupier, average price rises were 10.7 per cent yearly and 1.1 per cent monthly, with the average price tag £296,872.

Price increases on new builds outpaced rises on existing housing stock. For a new-build property, average price growth was 12.2 per cent annually and 5.1 per cent monthly, to £325,483.

Existing stock prices increased by 9.7 per cent over the year and 15 per cent month-on-month, to £251,199.

Mark Harris, chief executive at mortgage broker SPF Private Clients, said: “Continued strong demand for property, combined with a lack of stock, is pushing up prices further still.”

Nitesh Patel, strategic economist at Yorkshire Building Society, added: “Demand is strongest in areas of better affordability, namely the north.”

Nigel Purves, chief executive at Wayhome noted that for first-time buyers, “growth continues to exacerbate affordability concerns.”

Tomer Aboody, director of property lender MT Finance, added: “Buyer confidence remains high, in terms of the desire to move and in respect of getting the necessary finance approved, which is helping to push up prices.”

The overall 10 per cent price growth figure was driven by terraced houses at 11.4 per cent and detached homes at 11.3 per cent.

Price growth was lower for a semi-detached property price at 9.8 per cent, and for a flat or maisonette at 6.5 per cent.

The data for volume of transactions was not yet reliable because of the length of time taken to process deals, the report said.

However, comparing provisional estimates for March 2020 and March 2021, transaction numbers were up 71.1 per cent in England, 99.5 per cent in Scotland and 24.2 per cent in Wales.

The volume increase for property transactions Northern Ireland was 41.8 per cent in Q1 2021.