Expect disruption in the UK residential sector. House prices in August recovered from a recent dip and soared to an all-time high according to the Nationwide Building Society’s House Price Index. But another lender suggests that this looks like a bubble set to burst.
The house price growth phenomenon has occurred despite considerable uncertainty in the economy, chiefly owing to the effects of the Covid19 pandemic. Notably, the proposed end of the government’s furlough scheme in October will see the end of employment subsidies.
Prices rose 2% in August following a 1.8% rise in July which Nationwide says is the largest monthly rise since February 2004 and took annual house price growth to 3.7% from 1.5% in the preceding month. The increases have reversed the losses recorded in May and June, the society said.
Nationwide attributes the change to the easing of lockdown. “Behavioural shifts may also be boosting activity, as people reassess their housing needs and preferences as a result of life in lockdown,” said Nationwide’s chief economist Robert Gardner.
“Social distancing does not appear to be having as much of a chilling effect as we might have feared,” he added.
“Jaw dropping” recovery close to a bubble
Gardner warns that most forecasters expect labour market conditions to weaken significantly in the quarters ahead as a result of the after effects of the pandemic and as government support schemes wind down. He said this will dampen future housing activity.
Guy Harrington, CEO of residential lender Glenhawk, went further: “The speed of the market’s recovery is almost jaw dropping, with the recent stamp duty holiday and whimsical consumer behaviour seemingly turbo charging a market that looks increasingly disconnected from economic reality.”
Harrington added: “The government money train cannot go on forever, however. The end of furlough, which will be the trigger for a winter of pain for millions, is imminent, and that’s before we even factor in a second spike.
“The market looks dangerously close to bubble territory; it’s a matter of when, not if, it bursts.”