Will house prices drop? What you need to know for the end of 2020

To say that 2020 has been a tough year is a bit of an understatement.

For many of us -- largely confined indoors and working from makeshift home offices because of the coronavirus pandemic -- events have spurred a rethink of our housing situation.

Partly as a result, Britain’s property market experienced a mini-boom this summer and autumn, leading house prices to reach an all-time high.

Now, many buyers, sellers, and homeowners are wondering whether property prices are set to drop in the coming months.

Indeed, with fears of lingering COVID-19-related economic downturn and the government’s stamp duty holiday set to expire on 31 March next year, many analysts have counselled patience: hot UK house prices may cool in the short term, but are likely to return to a stable rate of growth in the medium and long term.

How did the Stamp Duty holiday impact property prices?

A couple of factors fuelled the spike in house prices in summer and autumn 2020.

First, pent-up demand from buyers and sellers who had endured a spring in which the lockdown had largely shut down the economy, led to increased activity in the housing market over the summer months.

Then, critically, in July the government instituted a Stamp Duty holiday. This tax relief policy meant that buyers had the opportunity to save up to £15,000 on their house purchase. The idea behind this government stimulus was to drive up demand, and encourage those reluctant to move to take the leap.

The stamp duty holiday means that buyers in England and Northern Ireland don’t need to pay tax on properties of £500,000 or less, while tax bills have also been reduced on more expensive home purchases.

The Scottish and Welsh governments have provided similar tax cuts that also run through March 2021. In Scotland, buyers of homes worth less than £250,000 (previously it was £125,000) don’t have to pay the land and buildings tax. In Wales, similarly, payment of stamp duty on property purchases up to £250,000 has been temporarily waived.

This means for many people the upfront cost of buying a house has been drastically reduced, and coming onto the property market that much more appealing. Increased numbers of buyers, leads to increased competition for the best properties, and this pushes up house prices. So, whilst the upfront cost of moving might have been reduced, the government's decision to bring in a Stamp Duty holiday has actually boosted the potential for house price growth in many areas of the country.

Once the holiday comes to a end next year, many people worry that this will cause a decrease in buyer demand, and as a result hit house prices too. For instance, the Centre for Economics and Business Research predicts that house prices will fall by up to 14% once the stamp duty holiday ends on 31 March. As a consequence many estate agents are now lobbying the government to extend this tax relief holiday beyond the March 31st 2021 deadline.

How have house prices changed in 2020?

At least one estimate in July suggested that the coronavirus market freeze earlier in 2020 wiped out £27 billion-worth of property deals.

But that economic pause, combined with buyers emerging from lockdown hungry for more spacious properties, has actually helped drive demand this summer. And, the temporary tax relief has supercharged it.

The news is full of headlines showing how well the housing market is doing. According to Rightmove the average asking price of property coming to market soared to an all-time high of £323,530 in September 2020. That is more than £16,000 higher than the same time last year.

Separate research from Zoopla shows that UK house price growth recently hit a two-and-a-half year high of 3%. The cities with the strongest markets are Nottingham, Manchester, and Leeds, with Aberdeen, Cambridge, and Oxford rating as the weakest markets in terms of asking price increases.

And the average rise in year-on-year home prices was distributed across the UK. As of August 2020, England (2.8%), Wales (2.7%), Northern Ireland (1.1%), and Scotland (0.6%) had all reported annual growth, according to the Office of National Statistics.

Want to get a sense of the house prices in your local area? We analyse data from all the major property portals, the Land Registry, and our own databases, to give you an accurate view of what's going on with the property market in your area. Pop in your postcode here to get all the stats.

There are signs that the market may be cooling, however.

Rightmove’s data indicates that although the number of home sales agreed in September 2020 was up 70% year-on-year, that figure had fallen to 58% in October.

Other reports suggest that the numbers are somewhat misleading because many of the sales that have taken place in the last few months have been on the high end of the housing market. Now, with fewer high-value homes coming to market, the housing sector could be facing a plateau.

It's likely that many people are hitting stumbling blocks when looking for a mortgage. Many lenders have restricted the number and types of mortgage products available, in response to the economic uncertainty of the year. This uncertainty looks set to continue, with the threat of further lockdown measures, and Britain's official exit from the European Union on the horizon. A reduction in mortgage accessibility can be off putting for first time buyers, in particular, and can hit demand in the market. Both of which can contribute to a slowing in price growth.

Analysts also predict that the growth in home prices will drop once various government coronavirus support schemes expire, because of the additional financial insecurity this will create for many people.

When will prices stop rising?

The country’s uneven recovery from the coronavirus pandemic introduces greater uncertainty into the UK housing market than usual.

Most analysts are optimistic that the next few months will continue to see some growth in the housing market.

Yet they also agree that the end to the stamp duty tax holiday on 31 March 2021, combined with the possibility of further job losses and wage reductions, is likely to put a drag on the buoyant market.

Still, in the long term, optimism remains. Research by estate agent Knight Frank suggests that by 2024 average home prices across Britain could jump £33,887 -- perhaps a 14% increase.

The North West (14.9%) and Yorkshire and the Humber (14%) are forecast to grow at the fastest rates, with London property price growth at the lower end at 9.1%.

What does this mean for you?

All signs point to the sky-high 2020 housing market beginning to come back to Earth in 2021.

But while the government’s announcement in October of a new three-tier lockdown will limit home viewings in some parts of the UK, the new restrictions are also likely to spur many people to rethink their living situation as they prioritise space and comfort over location.

If you are considering selling your home in the near future, don't delay. If you want to take advantage of the boom in buyer demand you'll need to put your property on the market very soon. Make sure you're armed with an estate agent with a strong track record of selling quickly, to boost your chances. Our free comparison tool can help you find the right one. Head there now.

For more information about selling a home in 2020, read our advice here.

If your plans are more long term, patience will be key. The market - and house values - might see a hit in the next year or so, but if you're willing to wait it out, it's likely that house values will rise again.