How Government policy drives house pricing

Examining how economic events and changes in Government policy can effect house pricing.

Millions of us are working hard to save enough money for a deposit and get our foot on the first rung of the property ladder. And for many of those lucky enough to own their own home, it is their biggest and most important asset.

Whatever your circumstances, we are a nation obsessed with home ownership and house prices. But what are the factors that really influence price? Whilst there are a myriad of factors affecting individual house pricing, in this blog we will focus on the bigger picture and how major economic events and Government policy impact wider trends in property prices.

The global financial crisis

In 2008, we experienced a huge global downturn in economic growth with many countries falling into recession. Following the economic crisis, property prices across London dropped by more than 10% over the course of a year. As you can see from the charts below, prices then began to rise steadily until 2016 and have remained relatively stable since. So, what are the big factors that have driven this movement?

The impact of Government policy

These graphs plot the behavior of the average London house price over the last 12 years. In 2015, we split the graph into an ‘All London’ average, an ‘Expensive district ’ average and a ‘Cheaper district’ average.
Key economic and policy changes have been highlighted.

Graph 1 - No inflation adjustmentGraph 2 - Adjusted for inflation

2007 - 2009

The Bank of England aggressively reduced interest rates from 5.75% to 0.5% allowing the cost of borrowing to drop to unprecedented lows, meaning cheap mortgages!
It helped to support the falling housing market and kickstarted the initial period of growth.

April 2013

The Government introduced its 'Help to Buy' scheme, helping first time buyers get on the property ladder by contributing to deposits for new-build houses. This increased demand for property and was widely viewed as helping to drive the rapid price growth seen over the next few years*

December 2014

The Government introduced a new way to calculate Stamp Duty, reducing the amount you are required to pay for cheaper properties and increasing the cost to buy properties over £937,000.

Examples:


A property of £510,000 saw the stamp duty bill reduced from £20,100 to £15,500
A property of £2.1m saw the stamp duty bill increase from £147,000 to £165,750

April 2016

A second home Stamp Duty levy is introduced to quell demand from buy-to-let investors. Those buying a property in addition to their main residence are required to pay an additional 3% in Stamp Duty.

April 2017

To further deter buy-to-let investors, the Government reduces the amount of mortgage interest landlords could offset against their tax bill.

December 2019

The Conservative Party wins a large majority at the general election. By many, this is viewed as putting an end to the Brexit saga and providing more economic stability to people and businesses.

How will coronavirus impact house prices?

There have been many questions recently about the impact coronavirus will have on house prices.

Unfortunately the answer is unclear at the moment. We don't know how long the lockdown will last and what the resulting impact on the wider economy will be.

In this blog we have demonstrated some of the ways in which government policy decisions have had a major impact on house prices. As a result, should we see further policy changes post-Lockdown, we would expect those, rather than normal market forces to determine the performance of the market over the coming year.