The UK housing market has undoubtedly seen some significant growth in recent times, with the pandemic sparking an expected frenzy of activity. Mass metro exodus; people fleeing to the suburbs for more space; dramatic drops in inventory supply coupled with peak demands driving up prices; the government dishing out various financial assistance and incentives to jump onto the property ladder - it’s been a wild ride.
Certainly, with such unprecedented conditions and an economy deep in the throes of recovery, it can be tricky to predict what the market will do next. That said, as the chaos of the pandemic begins to truly dissolve, the promise of some level of order being restored seems tangible.
A number of recent headlines are grabbing attention with some staggering market predictions. The loftiest of which appears to be that of Strutt & Parker, publishing a five-year forecast that estimates price growth of up to 35% in Prime Central London (PCL) and across the UK - triggering a swarm of curious online property valuations.
Savills’ five-year house price forecast has also recently anticipated continued growth, albeit at more conservative levels. The report outlines a projected growth of 3% in 2023, followed by 2.5% in 2024, 2% in 2025, and a further 1.5% in 2026.
The question is, in addition to the sizeable price hikes of recent times, do these predictions hold up?
Price growth not yet waning as demand remains high
Official figures from the Office for National Statistics show that the average price of a UK home rose by £25,000 year-on-year in August 2021, with increases reported across all regions.
Meanwhile, the annual price inflation rate in August reached 10.6% - quite a jump from the 8.5% recorded for July. According to official figures, this took the average price of a UK residential property to £264,000.
The pandemic-fuelled tax breaks, such as the Stamp Duty Holiday certainly helped to drive prices up as demand soared above supply. However, despite these tax breaks coming to an end, inventory is still down, suggesting that a continued imbalance with demand should prevent prices from falling.
This continued strength in market demand demonstrates that many homeowners are still re-evaluating their property needs. In addition, many households have also managed to build significant savings during the Covid-19 lockdowns, thus increasing the size of the deposits they can put towards upsizing.
Halifax, one of the UK’s leading mortgage lenders, has recently upped the sum it is officially willing to allow higher income-earners to borrow. The bank will now consider mortgage loans of up to 5.5 x salary to eligible applicants that earn over £75,000 annually. Admittedly this move will assist the maintenance of house price growth, as buyers will have more capacity to increase their offers.
Related: Moving Up The Property Ladder: A Guide
Related: Can I Move House And Keep The Same Mortgage?
Will interest rate rises make a difference?
House prices across the UK continued to increase through October, with such a consistent lack of new property listings outweighing other market factors.
According to a recent report issued by the Royal Institution of Chartered Surveyors, this trend is expected to continue well into 2022, despite the Bank of England warning of imminent rate rises.
The report demonstrated that the ongoing imbalance between supply and demand is currently a stronger influence over market conditions than the impending rate rises. It also showed that new buyer inquiries, as well as rental outlooks, rose most significantly in London and the South East - areas that were hit the hardest by the conditions of the pandemic.
The Bank of England’s move to delay any interest rate increase - coupled with the promise that they are not far away - was tactical in that it provided a sense of urgency to keep the market strong. Inevitably, however, the predicted uptick in the Bank’s base rate will dampen house price growth sooner or later.
Anyone making a property purchase must consider the house price in relation to the cost of borrowing, which is likely to increase in the new year. Unless wages significantly increase, or more banks follow suit with Halifax and begin lending higher multiples of borrowers’ salaries, forecasting any sizeable rise in house prices might not be the most sensible conclusion to reach.
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What about London?
Property prices in the capital are forecast to rise by 7.5%; the lowest property price rise across the regions. Still, the impact of property owners fleeing metro areas in search of additional space will likely fall away as the country reopens and both business and entertainment reawaken in the capital, drawing residents back in. The figures from the ONS still show that average property prices in London reached a new high of £526,000.
The London property market continues to be driven largely by transactions over £1m, with prime locations including Chelsea, Kensington, and Notting Hill outperforming the broader PCL market. It makes sense, then, that these trends are more likely to continue, as higher-income earners are less perturbed by increasing borrowing costs.
Renewed demand for London flats, however, is suggesting that growth for the capital is likely to become more balanced across locations and property types in the coming year.
Our Regional Director, Ed Lugg, MARLA, MNAEA, points out that “We should also consider the extent to which leaseholders - in London as well as country-wide - continue to suffer as they bear the costs of replacing cladding which is considered a risk-to-life post-Grenfell.” He continues, “The government appears resolute in its unwillingness to support the owners of these unsellable apartments, and there are no signs of life in this marketplace as a result. Where vendors have to sell, Portico is now recommending that they either let their homes out (if possible while the house is on the market), list them for lower prices (than they have paid in recent years), or advertise to cash buyers only.”
Moving towards market equilibrium in 2022
With the Bank of England expected to address the rising inflation by increasing its base rate soon, and potentially repeatedly, it seems sensible to make a conservative prediction that buyer demand will cool off. As borrowing costs begin to increase into 2022, demand should slow, giving the market a chance to catch up and return to some equilibrium in terms of the balance between supply and demand.
Our Regional Director, Vatche Cherchian, FARLA, MNAEA) believes that market conditions should remain broadly the same in 2022. He comments, “Continued low-interest rates (despite any minimal increases), coupled with fast economic growth should help boost the market. Still, price increases may well be hampered by the stock constraint, so a 0-3% increase is a reasonable prediction.”
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