The economy is recovering ahead of the initially expected schedule and, while this should continue next year, there are risks that supply chain and labour issues could push inflation well above target.
Central London’s sales market underperformed during the pandemic but should see strong growth in 2022 and 23. Its lettings market staged a very rapid recovery in Q3 but is also set to perform well next year. At national level house price inflation looks to have peaked this year, but growth is expected to continue at a slower pace.
House price forecasts
Experian’s latest house price forecasts for Cluttons are shown in the table below. This is part of a baseline* economic scenario that sees GDP grow by 6.6% this year and 5.4% in 2022.
Table 1 - Experian house price forecasts, October 2021
Source Experian. * Baseline economic scenario assumes that Coronavirus Delta variant is contained, with no further lockdowns in 2021.
Experian expect UK house prices to finish 2021 up by 5.3%, a very slight downgrade on the previous quarter’s forecast. The level of growth reflects continuing strong demand, low mortgage rates, and a lack of homes on the market. On the potential downside, the end of furlough support in September may reduce demand going forward if unemployment rises. Beyond the end of this year the outlook is weaker, with inflation set to outstrip house price growth over the next two years.
By contrast, the Central London sales market continues to show weakness in 2021, with a stagnant market limited by low levels of stock and some optimistic pricing. Experian anticipate that sales values will finish 2021 down by 2.6%, with 2022 and 23 seeing growth of 7.5% then 7.0%. This is driven by the stronger economy and a renewed appetite for investment (domestic and overseas) at competitive (at least by historical standards) prices. The rental recovery accelerated hugely in Q3, making up much of 2020’s losses in a single quarter. The latest forecast therefore brings forward much of the expected growth, seeing PCL rents return to pre-pandemic levels later this year, rather than 2023 as previously set out.
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 The range of forecasts for 2021 house prices submitted over the past 18 months is shown in Figure 1. At the end of 2020, the consensus was for values to fall back in 2021, and some forecasters were still expecting falls as late as June this year. The range of forecasts has narrowed somewhat in recent months. In the latest October report the median forecast was +5.3%, compared to +3.5% in July.
Table 2 – UK house price forecasts
Source Forecasters’ websites and publications. *OBR central scenario.
Risks and opportunities
Growth forecasts have been upgraded as the economy has recovered more quickly than initially expected, with unemployment not rising as high as feared and lower levels of scarring. However, faster growth combined with supply chain issues meant that inflation emerged as a risk in Q3, with shortages of materials and labour pushing up prices in many sectors.
With inflation rising, there are expectations of an interest rate rise in the new year and potentially as early as this December. Experian’s central scenario suggests any impact would be short lived, forecasting that CPI will peak at 3.9% in Q1 2022 before falling back to the 2.0% target around 18 months later. Higher inflation could limit the scope for further house price growth, with consumers having lower real buying power and potentially dealing with higher mortgage rates. With affordability already stretched in many areas, the market can be very sensitive to changes in the cost of borrowing.
The OBR’s Fiscal and Economic Outlook (published on the day of the Budget on 27th October) sets out a similar picture, expecting CPI to reach 4.4% in Q2 next year, 2.6 percentage points above the figure in their March report. They note that the peak in house price inflation appears to have already passed and expect relatively muted house price inflation from 2022 to 25, broadly in line with average levels of wage growth over the period.
The impact of the Coronavirus pandemic is no longer the sole focus of commentary like this, but it still presents risks. Lockdown restrictions have mostly been removed but increasing case numbers have led to concerns that controls may need to be reintroduced. While many sectors are now able to operate effectively with some level of constraints, overall this would be negative for the economic recovery.