The UK property market: the jewel in our crown or the thorn in our side?

21 July 2020

RSMR weekly broadcast

In the UK we’re obsessed with the property market, and we have a high rate of property ownership with 65% of households in England being owner-occupiers. Housing is the biggest component of most household’s wealth and has a big impact on the economy. Rising house prices are central to our economy and lead to an increase in consumer confidence so it’s a great barometer to measure how the wider economy is faring.

Why is a thriving housing market good for the economy? Activity in the housing market has a multiplier effect. It’s not just about the buying and selling of houses, the spending that filters through after the sale, such as estate agent fees, building and decorating, makes the housing market a great vehicle for generating economic activity.

UK house prices in general experienced some spectacular growth over the last few decades up until the Global Financial Crisis (although there were also periods of market weakness), and over the last ten years, they’ve made a fair recovery. Due to the wealth effect, rising house prices generally encourage consumer spending and lead to higher economic growth. A sharp drop in house prices adversely affects consumer confidence and construction and can contribute to an economic recession.

Why has the housing market continued to rise? In the UK there is a chronic shortage of property and a lack of new property. Immigration and societal changes, with one in four families requiring two homes due to separation or divorce, have increased demand. The cost of land and strict building laws have led to a structural shortage of houses. To maximise profit, builders tend to focus on the higher end of the market, meaning that new, affordable housing is rarely available.

The property market also has wider implications for the UK economy. For nearly 30 years, Britain has had a trade deficit, meaning it imports more than it exports, but this deficit remains manageable because of vast inward foreign investment channelled to UK property. International investors make up around half of all UK commercial property transactions and a large proportion of residential sales. If this investment stops, it will put pressure on property prices, affect UK GDP and tax revenues, and worsen the current account deficit of the country.

Lockdown has had a devastating effect on the housing market. Mortgage applications fell to around 8,000 in March from 70,000 in February, representing a huge reduction in activity. Four months of falling prices represent the worst performance of the housing market in the last decade.

To try and sustain confidence in an asset class that accounts for most of the country’s wealth, Chancellor Rishi Sunak has recently announced a reduction in stamp duty. He’s supporting first time buyers and those at the lower end of the property market by cutting

out stamp duty on house purchases under £500,000 until March 2021. This will cost the Treasury £3.8 billion, about 0.4% of the total tax take. You may ask why the government is utilising billions of taxpayers’ money to prevent house prices from falling at a time when the most disadvantaged people in society have been hit by the economic fallout of coronavirus, but as we’ve already seen, property prices remain key to our economic success.

Whether the government’s intervention is enough remains to be seen. The property market isn’t out of the woods yet and, with the UK in desperate need of taxation, it could be hit by capital gains tax in the longer term. Taxation in this area wouldn’t normally be considered due to the negative impact it would have on the property market and the wider economy, but the tax deficit will have to be plugged somehow and the possibility of changes to how capital gains tax is calculated in the future is already being floated in the press.

Britain should arguably be less dependent on the property market but for now house prices go hand in hand with economic prosperity.


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