KEY POINTS

  • U.K. house prices jumped by 5.2% in August on a year-over-year basis
  • The average U.K. house reached a price of £245,747 ($316,808) in August, the first time ever that the average price have exceeded £245,000
  • This cut in the stamp duty will expire in March 2021.

Housing prices in the U.K. are set to plunge by 13.8% in 2021 from this year as various trends and government support programs unwind, said the Centre for Economics and Business Research, or CBER.

CBER noted that during August, the British housing market set record highs in prices, despite the economic turmoil engulfing the country during the COVID-19 pandemic.

Indeed, in the second quarter of 2020, Britain’s gross domestic product contracted by a record 20.4% as millions remained in lockdown.

“The [U.K.] housing market was essentially brought to a standstill from late March through to mid-May by the lockdown,” said Howard Archer, chief economic advisor at professional services firm Ernst & Young.

But as the overall economy tries to recover, the housing market has been surging recently. In August, the Halifax House Price Index – operated by analysis company IHS Markit – indicated that U.K. house prices jumped by 5.2% in August on a year-over-year basis. That's the highest annual growth rate since the end of 2016.

The average U.K. house reached a price of £245,747 ($316,808) in August, a 1.6% increase from July, marking the first time ever that the average price have exceeded £245,000.

Russell Galley, managing director at Halifax, said the price surge was “fueled by the release of pent-up demand, a strong desire among some buyers to move to bigger properties, and of course the temporary cut to stamp duty land tax.”

The “stamp duty” referred to a decision made in July by the Chancellor of the Exchequer Rishi Sunak to temporarily cancel property tax on properties worth up to £500,000 ($645,000).

This cut in the stamp duty will expire in March 2021.

Galley himself warned it was “highly unlikely that this level of price inflation will be sustained.”

“Rising house prices contrast with the adverse impact of the pandemic on household earnings and with most economic commentators believing that unemployment will continue to rise, we do expect greater downward pressure on house prices in the medium-term,” Galley stated.

Now, CEBR estimated that the stamp duty act will generate a 1.2% increase in average home prices and a 6% gain in the number of housing transactions.

“The temporary nature of the tax reduction means that the policy’s short-term effects could be even more dramatic, as people rush to complete transactions before the return to the previous stamp duty regime at the end of March 2021,” CEBR stated.

CEBR further noted that between March and June of this year, there were 246,000 housing transactions conducted in the UK. But if transaction activity had remained at pre-crisis levels during this period, the number of transactions would have been about 394,000.

“This implies that nearly 150,000 house purchases that would otherwise have taken place were put on hold between March and June as a result of the coronavirus pandemic.” CBER said. “This shows the amount of pent-up demand built up during the lockdown. [This] suggests that buyers have returned to the market more quickly than sellers, [thereby] boosting prices.”

House prices have also been artificially pushed higher, CBER suggested, by some government measures that have, among other things, dramatically reduced the number of repossession actions. During the second quarter, the U.K. recorded only 161 mortgage repossession claims – when they are typically 6,000 such claims reported in a quarter.

The prohibition on mortgage possessions is slated to expire on Oct. 31.

“The suspension of forced sales and repossessions will have had some supply side impacts on the overall housing market throughout the second and third quarters, boosting prices as well,” CBER indicated. “Moreover, pent-up demand from the period of lockdown will eventually work its way out of the system in the coming weeks.”

As a result, CBER forecasts that average home prices will start to drop at the end of this year, which prices tumbling by almost 14% on average next year from 2020 levels.

The key London housing market is especially expected to suffer significant price declines – one factor is linked to the desire of many city dwellers to flee to cheaper rural regions while still working from home.

“There have been many changes as a result of the unprecedented pandemic, and these include a rewriting of the previously predictable seasonal rulebook for housing market activity and prices,” said Miles Shipside, director and housing market analyst at Rightmove, the online real estate website.

“More property is coming to market than a year ago in all regions… However, those expressing [the] most desire to move on are unsurprisingly in London and its commuter belt. London has 69% more properties coming to market," he added. "With work and transport patterns potentially changing most around the capital, commuter-belt properties need to have more appeal to prospective buyers than just proximity to a station… The out-of-city exodus has helped push prices to record levels in [rural] Devon and Cornwall, for example, where working from home means a different lifestyle much closer to your new doorstep.”