According to the Home Tracks UK House Price Index for September 2021, the following trends have been observed:
Record year for sales and prices – No cliff edge
£473bn of new sales are expected in 2021, up £95bn from 2020. This is the strongest price and sales growth since 2007. The ongoing re-evaluation of housing, low mortgage rates, and the extended stamp duty holiday all contributed to this.
The stamp duty holiday does not solely affect market conditions. Other factors shape the market. Housing demand has consistently been 25-30% above the five-year average since the summer.
As the year draws to a close, we expect demand to be stronger than in 2018. In the UK, house prices are rising at an average of 6.6%, with all regions and countries showing much higher growth rates than the 5-year average.
Clear Evidence of a slowdown in rate of price inflation
The last 18 months have seen an uneven demand for homes. According to home tracks analysis, the mix of home buyers and the prices of homes sold have shifted significantly over this period.As the economy reopens and mortgage availability improves, the mix of buyers has started to return to normal.
In the meantime, there is clear evidence that the value of homes for which new sales are being agreed is growing more slowly. In Q4 and into 2022, the rate of price inflation is likely to moderate, signalling a turning point in house price growth.
Current momentum to outweigh emerging headwinds
As we look forward to 2022, price inflation and overall sales volumes are expected to experience a balance of positives and negatives.
Positively, housing prices are still affordable in many markets, and lenders will continue to compete fiercely, despite an increase in mortgage rates. It is likely that there will continue to be a scarcity of homes for sale well into 2022, which will contribute to rising prices.
Moreover, the impact of the pandemic on home buying decisions will last for some time. Property values have grown by more than 40% since 2020, attracting sellers to the market.
Further room for growth in affordable markets
The affordability of housing is important but no guarantee of activity and rising prices. Many parts of the UK remain affordable.
In the region and country with the highest growth rates, the house price to earnings ratio is the most affordable. In areas outside southern England, we believe there is room for more house price inflation above average.
Pandemic impact on the market has further to run
The impact of a global pandemic on the UK housing market was not going to be short-lived, as has become evident.
We estimate that the pandemic’s impact will extend through 2022, supporting market activity and sales volume. In some parts of the labour force, hybrid employment patterns will emerge as a result of an ongoing re-evaluation of housing needs and increased housing equity.
According to Zoopla research, 22% of UK households are “eager” or “very eager” to relocate in the next 18 months.
However, it is important not to overestimate the impact of the pandemic. Sixty percent of respondents said their motivation for moving had remained the same. It was observed that younger families with growing families tended to be more willing to move than older, more established families in their current home.
Higher mortgage rates impact buying power and activity more than prices
Low mortgage rates have contributed to an increase in house prices over the last decade.Mortgage rates have ranged from 2% to 3% since 2015, reaching a low of 2.1% in the second half of 2020.
However, the regulation of mortgage lending since 2014 has prevented an unsustainable boom in house prices. Mortgages, in general, are better protected than in the past, but are not immune to higher interest rates.
By the end of 2022, mortgage rates are expected to reach 3% – the highest level since 2015, but still low by historical standards.
Strongest price growth in regional markets in 2022
The average house price will rise 3% by the end of 2021, down from 6%. As a result of the pandemic and artificial stamp duty holiday deadlines, prices have been rising over 2020 and 2021. These factors won’t exist in 2022.
Along with our expectation that mortgage rates will increase modestly, we believe the net result will be a moderation in the growth rate.