London CNN Business  — 

Britain’s housing market is on a tear.

Pent-up demand following lockdowns, a temporary tax cut, record low interest rates and government support for workers and mortgage holders have spurred a rebound that’s taken analysts by surprise.

The average price of a UK home soared to an all-time high in September, according to leading mortgage lender Nationwide, despite a pandemic-induced recession, rising joblessness and fears that a second coronavirus wave and a messy Brexit could stall the economic recovery.

“Confidence in the housing market has been unexpectedly strong,” said Hansen Lu, a property economist at Capital Economics. “We’re seeing a V-shaped recovery.”

But a relatively small number of wealthy buyers who already own properties appear to be driving the recovery, raising questions as to how long the boom will last, particularly if the economy’s prospects worsen.

At least for now, the economic pain of the pandemic has mostly been felt by younger, lower income individuals who were already least able to buy homes, said Neal Hudson, founder of housing market research firm Residential Analysts.

By contrast, those who are buying may be in an even better financial position than they were before the coronavirus hit, as overseas holidays were canceled or they went out less during lockdowns. Add in the cut to purchase taxes, which runs until the end of March, and demand for more expensive houses has surged, further lifting prices.

The number of sales of homes costing over £1 million ($1.3 million) in the first half of August was more than double the same period last year, following huge increases in June and July, according to housing market data provider, TwentyCi.

Wealthier individuals have been fleeing cities for larger suburban homes with gardens in the anticipation that they won’t need to commute into central offices as much even after the pandemic ends. In the first nine months of this year, sales agreed in 16 English villages, several within an hour or two train ride of London, outpaced totals for the whole of 2019, according to property portal Rightmove.

The pandemic has sparked a “once-in-a-lifetime reevaluation of what a home means to people,” said Richard Donnell, research director at property portal Zoopla. “Lockdowns brought people into the market who weren’t planning on moving,” he told CNN Business.

Demand from existing homeowners is 53% higher than it was at this time last year, while growth in the number of first-time buyers could stall for the first time in a decade as banks take a more cautious approach to lending in the face of the economic downturn, Donnell added.

A decline in housing market activity is borne out by transaction data. The UK tax authority estimates that residential transactions in August were nearly a quarter below the same month last year.

“To end up with a period where you have rising prices, you might only need 10,000 or 20,000 new buyers in a month,” said Hudson, the independent analyst, noting that it would equally not take many forced sales to push prices down.

And major uncertainties linger. With the UK government scaling back its support for wages from next month and a surge in coronavirus cases leading to fresh restrictions that will do more damage to jobs and the economy, analysts caution that the rally could be reversed before long.

“The longer the pandemic goes on and the longer [the economy] isn’t able to return to normality, the greater the risk that house prices will see a major downturn,” said Lu of Capital Economics. The last time prices fell significantly was during the global financial crisis, but they have risen steadily since then.

A looming correction?

The Centre for Economics and Business Research (CEBR), a London-based consultancy, expects a fall of roughly 10% in UK house prices next year.

That’s less bearish than the 14% it forecast just a few weeks ago and partly reflects the sustained strength in the market, said senior economist Pablo Shah.

The average price of a home reached a record of £226,129 ($286,000) last month, a 5% gain on the same period last year, according to Nationwide.

The CEBR’s forecast also takes into account ongoing government support for wages, which although less generous than the initial furlough program is likely to limit job losses, Shah added. The job support program and mortgage repayment holidays have to a large degree insulated households from the economic turmoil thus far, he told CNN Business.

Mortgage payment deferrals peaked at over 1.8 million in June, but have since fallen to 731,000 in the middle of August, according to UK Finance, a trade association for banks.

Borrowers still have until the end of October to apply for a first or second three-month payment holiday. Those granted deferrals may not have trouble making payments until after January next year.

But even if they fall behind on payments, banks are expected to take a more generous approach than they did during the last recession, not least because their own finances are healthier and mortgage regulation has limited the ability of people to overextend themselves. Record low interest rates also make repayments more affordable.

“Lenders understand that many households will continue to see their finances squeezed as the pandemic continues and will be offering a range of support for those who need it,” said Eric Leenders, head of personal finance at UK Finance.

Fewer repossessions will mean fewer forced sales, helping to support prices.

“Politically there will be a lot of pressure on [lenders] to avoid [repossessions], and a house price collapse is not good for them,” added Hudson.

Still, he expects transactions to drop sharply after the cut in purchase taxes expires in March.

And if job losses become more widespread, downward pressure on incomes could translate into “much bigger pressure on house prices,” he said.