A boom in demand for housing has catapulted prices to highest-ever levels.

According British mutual financial institution Nationwide, the average price of UK property has risen by 12.6% (£29,162) in the past year to £260,230 this February, compared to the previous month of 11.2%. The result for February was the fifth straight monthly rise, and the highest yearly gain in monetary terms since the company’s first monthly index back in 1991.

A typical property is now £44,138 more expensive than it was in February 2020, the month before the pandemic hit the UK.

Demand for houses increase during pandemic

Since Covid-19, demand for houses have increased as borrowing rates remained low and purchasers hurried to take advantage of stamp duty tax discounts. In addition, a restricted supply of properties on the market kept prices rising.

According to estate brokerage Chestertons, regionally, London experienced an increase in buyer queries. In February 2022, inquiries climbed by 36%, while the capital’s average property price increased by 7% over the same time.

“Although the suburbs remain a popular option, the amount of buyer queries for regions like Richmond or Kew has stayed at last year’s levels,” said Guy Gittins, chief executive officer of Chestertons.

According to the consultancy Property Search, several southern counties are also popular. South West Surrey, Hampshire, and West Sussex have had unusually high levels of interest, resulting in intense bidding among buyers.

“Competitive bidding has frequently led to a best and final offer situation with negotiated pricing on several instances hitting more than 10% over the price being requested,” said Simon English, specialist purchasing agent at Property Search.

Demand may start cooling down soon with the situation in Ukraine

However, as the cost-of-living crisis weighs on people’s finances and consumer confidence falls, demand for homes may soon decline.

“The continued buoyancy of the housing market is a little surprising, given the mounting pressure on household budgets from rising inflation, which reached a 30-year high of 5.5% in January, and since borrowing costs have begun to rise from all-time lows in recent months,” said Robert Gardner, Nationwide’s chief economist.

The strength is especially notable given that the strain on family incomes has resulted in a severe deterioration in consumer confidence. The public’s perceptions of the broader economic outlook and expectations for their financial conditions over the next 12 months have regressed to levels seen at the onset of the pandemic. The compression on family earnings is expected to worsen in the coming months, with experts predicting that inflation will reach 7% by the summer. Furthermore, the Bank of England is expected to hike interest rates further, which might have an impact on the housing market if it is passed on to mortgage rates.

According to Karen Noye, a mortgage specialist at Quilter, the situation in Ukraine may potentially limit buyer interest. “Energy prices were already increasing previous to the crisis, but with Europe now seeking other energy supplies from outside Russia, costs are expected to rise much more.”

This stress on everyday expenses would naturally trigger reconsidering when it comes to the costly process of relocating and risking financially security at times of uncertainty.

According to Ms. Noye, the threat of increasing inflation and interest rates would “take the wind out of the sails” of the mortgage market as inexpensive offers dry up.

Those who have already acquired a fixed-rate mortgage may be thankful but for those who are looking to buy, increased rates may come as a surprise.