The UK’s property bubble – what will happen next?

When will the UK’s property bubble burst?

This question has become increasingly prevalent over recent months. The fact it has is a reflection of two things: the significant uptick in both house prices and transactional activity since the introduction of the stamp duty holiday in July 2020; and the constant presence of doom-mongers both inside and outside of the property market.

According to Halifax, UK house prices are rising at their fastest pace in five years – they jumped by 1.4% in April alone (8.2% in the past 12 months), taking the average selling price to a record high of just over £258,000. Further to that, the volume of transactions in March were the highest in more than 15 years.

Is this growth sustainable? Almost certainly not. However, that is not to say the market will burst and prices will come tumbling down.

A burst bubble is unlikely

But a market crash has been predicted in some quarters. Indeed, the end of the stamp duty holiday – currently set to taper down from July 1 before the tax returns to normal levels from October 1 – has been earmarked as a potential trigger for this event, just as its introduction helped to spark the current boom in the first place.

It seems likely that the steady return to the stamp duty status quo will go some way to stabilising the market. It will almost certainly dampen the huge levels of demand currently experienced from buyers, sellers and investors, although perhaps not to such an extent that prices enter into a downward spiral.

After all, it would be foolish to pretend that the current buoyancy of the UK property market is purely the result of the tax savings on offer. That has helped to unlock the near-constant demand that exists among people who want to invest into bricks and mortar, whether that is as a place for themselves to live, or purely as an investment property for rental return or longer-term capital growth.

The prevailing economic uncertainty that has lingered in the UK since 2016 has played a part in driving this demand. Indeed, since the June 2016, the country has had three Prime Ministers, two general elections, the fallout from the EU referendum, the formal Brexit process, and of course, the Covid-19 pandemic. In such turbulent times, people tend to gravitate towards safe haven assets, and in the UK real estate falls under that bracket.

For instance, last summer FJP Investment commissioned an independent survey among over 852 UK adults, all of whom had personal investments worth in excess of £10,000, not including property, pensions, savings or SIPPs.

Our research found that 48% of the investors considered property as a safe and secure asset in the midst of the pandemic – this compares to just 12% who do not think real estate was a reliable investment.

The fact that consumers and investors will flock to property in times of uncertainty is not surprising when we consider the long-term performance of bricks and mortar as an asset. According to Land Registry data, the average UK house price rose from £50,000 in 1990 to £250,000 in 2020.

This is why I remain optimistic that the property bubble will not burst. Growth might slow or stagnate, but historic data shows us the undeniable, unrelenting rise in prices.

What next for the property market?

We are arriving at an interesting crossroads for the property market. The recent Queen’s Speech made prominent mention of the government’s plans to dramatically overhaul the UK planning system; add to that the tapering down of the stamp duty holiday and the hopeful transition out of pandemic-inspired restrictions and it will be fascinating to see how the real estate sector progresses in the months to comes.

In my opinion, creativity should be a watchword for the UK government when it comes to nurturing the development of the property market. That is not to say it necessarily wants the house price boom to continue in the long-term – it would inhibit many people from getting onto or moving up the property ladder – but the pandemic has certainly shown how creative policies, reforms and investments can dramatically alter the make-up of the market as a whole.

To that end, it was refreshing to see the government reaffirm its commitment to reforming the planning system. While the devil will be in the detail, the initial proposal put forward appears positive – it will remove significant roadblocks that prevent new-build developments from gathering momentum, in turn helping the public and private sectors to collaborate in order to address the severe housing crisis.

I would also like to see an ongoing evaluation of the taxes that impact upon property buyers and investors. Not only stamp duty, but capital gains tax and inheritance tax could also undergo changes to ensure more people are able to realise their ambitions of owning property.

Further, creative policies could help incentivise action to ensure more derelict properties are brought back onto the market. Indeed, statistics published by the Ministry of Housing, Communities and Local Government put the number of empty homes in England at approximately 650,000 – local governments do have powers to bring these properties back into use, but within the context of demand significantly outweighing supply in the housing sector, more must be done to tap into this often-overlooked corner of the market.

The pandemic has uprooted the fabric of society and forced governments, consumers, investors and businesses to rethink how they operate. Let us not immediately revert back to the norm – rather, as we consider where the property market will go from its current boom, we should emphasise the importance of creative ideas for change and reform to ensure the entire real estate industry is placed in the best possible position for stable, sustainable progress in the months and years to come.

*Jamie Johnson is the CEO of FJP Investment, an introducer of UK and overseas property-based investments to a global audience of high net-worth and sophisticated investors, institutions as well as family offices.