UK house price growth is likely to slow in the second half of the year as the Stamp Duty holiday reaches its end and government support schemes are withdrawn. Rents in Prime Central London are expected to bounce back slightly this year after a very poor 2020. Next year could see strong growth for both sales and rental values as the London economy, and its global connections, get back closer to normal.
The table below shows Experian’s latest house price forecasts for Cluttons, all based on their latest central economic scenario of GDP returning to end-2019 levels in Q3 2022 – which is a faster recovery than expected last quarter.
Table 1: Experiean House Price Forecasts, April 2021
At national level, while the expectation from Experian overall is for modest growth over the next two years, the shape of their forecast sees growth peak in Q2 this year before slowing rapidly over the rest of 2021 as the Stamp Duty holiday reaches its scheduled end date, pent-up demand is exhausted, and furlough and business support schemes are withdrawn before the economy is fully recovered. In 2022 small falls are expected as demand weakens, before values finish the year approximately flat.
In Prime Central London Experian anticipate further small falls in the sales market this year, with reduced overseas demand continuing to be a drag on values despite the domestic economy starting to reopen. Rents are expected to bounce back slightly after a very poor 2020, while 2022 will see strong growth for both sales and rental values as the London economy, and its global connections, get back closer to normal.
Note that the short-term outlook is sensitive to changes in the pandemic and any policy responses, in particular due to further virus variants, the success or otherwise of the vaccination programmes, and extensions to the economic support packages.
The HM Treasury comparison reports collect economic forecasts on a range of subjects, including house prices. A sample of UK house price forecasts from the April report are shown in Figure 1, compared against their equivalents from January and October. Last quarter there was a consensus in favour of small price falls by the end of the year, but now the chart highlights mixed sentiment, with some forecasters sticking to their negative outlook and others quickly responding to changing conditions by upgrading the expected level of growth.
Figure 1: 2021 UK House Price Forecast Comparison
Source: HM Treasury (Month is date forecast made)
The median of all new forecasts in the report was +1.6% in April, compared to -2.8% in January. The OBR’s central scenario from their March Economic Outlook is +0.2%, up significantly from -8.3% in the November edition.
A selection of the latest forecasts from other property consultancies are shown in the table below, along with the central scenario from the OBR. While there is agreement about strong growth towards the end of the forecast period, the consultancies are much more positive about the market up to 2023, having revised their figures up following the high levels of growth seen in Q4 and in 2021 so far.
Table 2: UK House Price Forecasts
Source: Forecasters' websites and publications. *OBR central scenario
Risk and Opportunities
In the very short term, the demand for housing apparently generated by the pandemic shows no sign of weakening so, combined with the extended Stamp Duty holiday, Q2 is likely to see more of the same: high price growth and activity levels. With the late announcement of the extension and the introduction of a taper, any ‘cliff edge’ effect on transactions in either June or September should be reduced, but some level of drop-off is inevitable.
From Q4 there is considerable uncertainty, as the return to previous tax levels coincides with the scheduled end of furlough and the expectation that unemployment will rise substantially from its current, artificially low, level. On the positive side, a majority of the population should be fully vaccinated and much of the economy will be operating close to normally. So, assuming the economic recovery is underway, the key question is simply whether the high levels of demand seen over the past year are sustainable.
Unfortunately, it will take some time to be able to tell if this demand is a one-off reaction to the pandemic – the so-called ‘race for space’ – or if there has been a permanent shift in the relative value of different housing attributes. If it’s the former, there is a risk that certain sections of the market become overvalued, possibly moving towards bubble territory.