The number of new homes listed for sale in the UK is up for the first time in 12 months, according to the latest Residential Market Survey by the Royal Institute for Chartered Surveyors (RICS).
RICS reported an 8% rise in the number of respondents who reported an increase in the volume of new listings entering the sales market in March. The number of new buyer enquiries also rose by around 9% in March. This represents the closest metrics of supply and demand since the onset of the Covid-19 pandemic in early 2020. The number of agreed sales was unchanged from February with around 9% of respondents reporting an increase, which is indicative of a steady upward trend in transaction numbers.
However, despite this recent rise in new listings, the number of properties on the books of estate agents is still close to historic lows. And the depleted supply chain has led to some of the sharpest rises in UK average house prices for decades.
We are going to take a look at why it is that the number of new homes for sale is up, what it means for house prices, and what the context of the property market is behind this recent shift.
Why is the number of new homes for sale up for the first time in 12 months?
Many first-time buyers sought to get on the property ladder in 2020 and 2021, but there was a lack of supply as existing homeowners were less eager to buy and move to new properties during the lockdowns than renters were. Though the demand for property is still high, it has slowed slightly and supply has risen as the lockdowns have ended, meaning there is a more equal balance between supply and demand than there was previously.
Although the market appears to be levelling off somewhat, house prices are still at historic highs and the RICS survey also predicts that house prices will continue to steadily rise over the coming years.
So let’s jump in and take a look at what this means for house prices.
What does this mean for house prices?
Although the rise in homes for sale adds some supply stock to the housing market, average house prices are still high and the growth rate of property prices in the UK is at record levels.
74% of respondents to the RICS survey saw a rise in house prices in March and respondents generally expected house sales to continue to rise further in the coming three to twelve months. Over the next five years, respondents to the survey said they expect house prices to increase by around 4% per year.
Over time, the increase in supply coupled with rising interest rates should temper the growth rate somewhat and bring average prices back to a steadier level.
What is the house price growth rate?
The house price growth rate measures the rate at which the price of the average house in the UK is rising.
In June 2021, the UK average house price rose by 13.2% over the year since June 2020. This represented the highest annual growth rate since November 2004. Compare this to the 0.8% change between December 2018 and December 2019, and it is clear to see why many forecasters are predicting a housing crisis in the coming years.
House prices have continued to climb since June 2021 and the growth rate was at 9.6% in January 2022, which was slightly down from 10% in December 2021. This meant that in January 2022, the average UK house price was £274,000, which is around £24,000 higher than it was in January 2021.
What are the average house prices across the UK?
As we have just seen, the average house price in the UK was £274,000 in January 2022.
England remains the most expensive place to buy a house with the average house price at £292,000. This represents a 9.4% rise in the year between January 2021 and January 2022.
Wales saw the sharpest rise in growth rate during that period, with the average price of a house in Wales reaching £206,000. This represents a 13.9% growth rate over the previous year.
Scotland’s average house price grew by 10.8% over the year to £183,000. And Northern Ireland had the lowest average house price at £159,000, which still represented a 7.9% rise from the previous year.
Why are house prices rising so much?
The sharp rise in demand for houses between 2020 and 2021 was pushed by house hunters looking to make the most of the Stamp Duty holiday and move to more affordable locations whilst working remotely.
Because the Stamp Duty holiday was particularly aimed at first time buyers, many of the people looking to make the most of it were trying to move from rented accommodation to owned accommodation. As the demand for houses rose, it was not met by a similar rise in supply as those who already owned property were less likely to benefit from the Stamp Duty holiday and were, therefore, less likely to want to move, especially during a global pandemic.
This dissonance between the supply chain and the level of demand created a major imbalance and meant that the price of property rapidly inflated. The average house price and the growth rate have since remained high even beyond the Stamp Duty holiday.
The demand for property remains relatively high as more and more people seek to move away from expensive cities such as London as an increasing number of jobs can be completed remotely, though it has slowed considerably since the rise in interest rates.
What was the purpose of the Stamp Duty holiday?
Stamp Duty is a tax that buyers pay when they buy a property. The growth rate over the last couple of years can largely be attributed to the Stamp Duty holiday that was brought in during the covid-19 pandemic. The Stamp Duty holiday was brought in between June 2020 and June 2021 to try to ensure that the housing market remains resilient during the lockdowns.
In England and Northern Ireland, the Stamp Duty threshold was changed to £500,000. Prior to the holiday, the threshold was £125,000 for residential properties and £150,000 for non-residential properties or land for sale. In the same period, the threshold was changed to £250,000 in Scotland and Wales.
What does this mean for the rental market?
Demand in the rental market also continues to rise at a rapid rate, with 54% of the RICS survey respondents citing a rise in landlord instructions in March.
Despite more properties being listed for rent, demand still outpaces supply. This means that rental growth expectations are also expected to rise, with 64% of respondents predicting them to do so.
Respondents anticipate rents to rise by 4% for the next twelve months and 5% each year when looking at the five-year projections.
How have interest rates affected the property market?
In the UK, interest rates are set by the Bank of England and refer to the amount of money that borrowers have to pay back to the bank on top of any money they have loaned. Although other banks and lenders are not obliged to follow the Bank of England’s interest rates, they set the bar and are the most influential player in how other interest rates are set.
Low-interest rates encourage borrowing and generally mean that a larger number of people take out mortgages and buy property. High-interest rates are generally implemented in times of relative financial stability.
UK interest rates have been at historic lows since the 2008 banking crisis. Prior to the financial crisis, UK interest rates were at just below 6%. Since then, they have hovered below 1% and have frequently been at just 0.1%.
The Bank of England increased interest rates from 0.1 per cent to 0.25 per cent in December 2021. It was then raised further to 0.5 per cent in January and crept up to 0.75% in March. This rise in interest rates is likely to prevent people from getting onto or moving up the property ladder.
People are also faced with the growing cost of living crisis, driven by a huge rise in energy bills and council tax, amongst other things. Rising interest rates will only stretch finances further and it is likely that both factors will limit demand in the property market significantly.
Many experts see the rise in interest rates as a necessary way to deal with the huge rise in the demand recently experienced in the market. Which, as we have seen, has not been met by the supply and has, therefore, led to the sharpest rise in house prices for years.
Others argue that the best way to combat the recent rise in demand is not through hiking up interest rates, which places the burden on consumers who are struggling as it is, but rather for the government to build more affordable housing. This would be a long term project that has been neglected by successive governments and would be an effective way of meeting the rise in demand with an equal rise in the supply chain.
How many properties are sold in England?
In England in 2019, there were 989,800 property sales. That figure then fell the following year in 2020 to 888,290, only to rise again (largely due to the Stamp Duty holiday) in 202 to 1,262,880.
In February 2022, it was estimated that there were 112,240 transactions for residential properties in the UK. This is 20.8% lower than that of the previous year but 4.4% higher than the number of sales in January 2022.
What is the Royal Institute for Chartered Surveyors (RICS)?
RICS are a globally recognised professional body of surveyors that seeks to effect positive change in the built and natural environments.
With offices across the world and in every significant financial market, RICS is ideally situated to influence policy within businesses and governments in order to help build a better world for future generations.
Of the recent rise in new homes for sales, RICS chief economist Simon Rubinsohn said: “Despite mounting concerns about both the macro environment and the war in Ukraine, for now, the feedback to the RICS survey shows the housing market remains resilient. Rising interest rates have begun to push up the cost of mortgage finance but debt servicing remains low in a historic context which helps to explain why the new buyer enquiries indicator remains in positive territory.
“Meanwhile, it is encouraging that a little more stock appears to be returning to the market. This is still early days in that inventory remains not far off historic lows but if the trend continues, it could help to create a better balance between supply and demand. That said, there is little evidence of this outcome materialising in the twelve-month metrics which continue to point to further increases in prices and a flatter pattern in transactions.”
The number of new homes up for sale in the UK has risen for the first time in 12 months. This is welcome news as the imbalance between the demand for property and the supply chain led to some of the most inflated house prices in decades. The rise in interest rates and the cost of living crisis is likely to ease off the demand for housing somewhat and should see the growth rate of house prices reduce even more so in the coming months.