Are we heading for another property market crash?

As each month goes by it seems a new property price rise record is broken.

In the year to March, for example, the average value increased by more than 10 per cent.

It’s now £24,000 more expensive to buy somewhere than it was a year ago, according to the latest official data from the Land Registry.

But that was a year of unprecedented financial chaos, and such a stellar increase seems an almost perfect contradiction to the 10.2 per cent dive in gross domestic product (GDP) - the measure of total economic value - in 2020.

The UK economy is recovering well from last year’s carnage, largely helped by the successful vaccine rollout, but we are still in a global pandemic and have just experienced one of the worst economic recessions in our history.

The last time house prices increased by similar rates was in the months leading up to the financial crisis of 2008-9. Now there are growing fears that we’re set for another collapse.

To understand what is bubbling under the surface, we need to look at the different factors that have fuelled such fervour.

One major influence is the temporary stamp duty holiday, brought in by the chancellor, Rishi Sunak, to boost the housing market after it shut down in March 2020. It means no stamp duty is paid on the first £500,000 of a new property, saving home buyers up to £15,000.

The holiday has resulted in a huge surge of people buying homes to take advantage of the tax break, but the saving doesn’t balance out the current rising prices and is never worth it if later down the line you’re not able to afford the home you’ve just bought.

Several government schemes have also contributed to the rise, including the furlough scheme, which is due to close on September 30.

Those who have kept their jobs have also been able to save more in lockdown. These accidental savers are now in a better position to buy a new home and may have moved their purchase forward.

Meanwhile, the pandemic has changed the way we live and work with millions working from home and no longer needing to commute into a city centre office. This has led to many workers keen to swap their city property for a countryside home.

The conditions for buying are also supporting the market. Interest rates have been at 0.1 per cent since March 2020 and mortgage rates have stayed low as a result, creating cheaper borrowing.

Mortgages requiring just a 5 per cent deposit are also back. The government-backed 95 per cent mortgage scheme was launched earlier this year and several providers have offers available through the scheme or directly. These are aimed at helping those with small deposits but in reality they cost a lot more than mortgages with a bigger deposit.

Supply is also a big influence and until the imbalance between the supply of homes and the demand for people wanting them is fixed, prices are expected to remain high.

David Hollingworth, a director at L&C Mortgages, comments: “As we emerge from lockdown the hope will be for the economy to expand and the early signs are that unemployment should be lower than previously anticipated.

“However, unless the supply of property to be sold rises to meet the demand the consequent imbalance could see prices push higher, reducing the chances of some to make their purchase until there is a flattening off.”

So, what’s the problem with rising house prices? For many people it won’t be an issue, and rising prices don’t always end with a market crash either.

Sarah Coles, spokesperson for Hargreaves Lansdown, explains: “Crashes tend to be precipitated by something specific that causes a crisis in confidence. During the financial crisis it was the fallout of irresponsible mortgage lending; in 1990 it was sky-high interest rates and then unemployment.”

The pandemic has shown us nothing is certain and things can very quickly change. At the moment housing experts are largely remaining cautious about what will happen later this year.

Coles adds: “The jury is out over whether we’re going to get a similar blow to buyer confidence in the near future.

“The initial worry was unemployment, and whether the end of the furlough scheme before the economy was back on its feet would mean a major rise in joblessness. The extension of the scheme, progress towards reopening the economy, and the pace of the vaccination programme, have all cut this risk significantly. However, much depends on whether the Indian variant sets the economy back again this summer.”

The process of buying a house has changed in the last decade and lenders need to carry out stricter eligibility checks to make sure lenders can comfortably pay the money back.

“Although the 95 per cent availability will help accelerate some first-time buyers’s ability to climb onto the first rung of the ladder, the challenge of affordability will hold many back and still require a bigger deposit to be built up,” says Hollingworth.

“Although lenders will try to put some flexibility into their criteria where it can be merited, the concept of affordability that came out of the fallout of the crisis means that borrowers need to demonstrate that they can afford the mortgage and that it will be sustainable.

“That should help ensure that we don’t see the spiralling in borrowing to boost prices ever higher that became a feature of the market in 2007.”

But although stronger affordability checks are in place, people are right now buying houses for £24,000 more than they would’ve paid just a year ago. Throw in an unstable jobs market and a potential rate rise and things begin to look grim.