Forecast and outlook Q2 2022

Q2 saw the first small signs that the struggling economy was starting to impact the housing market, but some forecasters are still upgrading their growth expectations for 2022 based on the very high levels seen in the first half of the year.

The outlook for Central London now looks very different between the sales and rental markets. Buyer demand has cooled off in the face of economic uncertainty. However, the rental market remains buoyant with demand well ahead of supply.

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 only 0.5% in the 12 months to December 2022.

Table 1 – Experian House Price Forecasts, August 2022

 UK house pricesPrime Central London house pricesPrime Central London rents
2022+4.6%+0.0%+7.5%
2023+2.2%+4.3%+3.0%
2024+3.9%+4.3%+2.0%
2025+4.0%+3.5%+2.1%
2026+4.0%+2.5%+2.2%
5-year average+3.7%+3.2%+3.3%
Source: Experian

UK house price growth of 4.6% is forecast for 2022 by Experian, an upgrade on last quarter’s figure of 2.2%. However, with inflation expected to hit double-digits over the second half of the year, even this higher figure would be a significant fall in values in real terms. Over the remainder of the five-year horizon, the forecast is unchanged. Over the full five-year forecast period the total amount of growth is unchanged at around 18%.

Experian set out three broad reasons for growth continuing, albeit at a lower level. First is that higher-income households – i.e. those likely to be potential home buyers – have built up savings through the previous two years and retain buying power. Second, the labour market remains resilient. Finally, low numbers of forced sales and/or repossessions plus tight supply in general are acting as a natural support to values.

Prime Central London sales values are expected to grow by a similar amount as the mainstream UK market over five years, but the profile of growth is different. Experian forecast that values will finish 2022 flat before growth picks up again from 2023. On the rental side the short-term forecast was upgraded again following the performance in Q2, annual growth of 7.5% is anticipated at the end of 2022 before slowing back to around 3% per year.

Other forecasters

The HM Treasury comparison reports collect economic forecasts on a range of subjects, including house prices. The range of forecasts for 2022 house prices submitted over the past two years is shown in Figure 1. Recent months have seen a large divergence of views, perhaps reflecting the apparent disconnect between worsening economic fundamentals and the continuing strength of the housing market. The median forecast for 2022 growth is now 7.3%, compared to around 2% at the start of the year.

Figure 1 – 2022 UK house price forecast trend

Source: HM Treasury (Month = date of report, data is the range of forecasts made in last three months)

There were further forecast revisions by some of the other property consultancies since our last update. Savills upgraded their five-year forecast on the basis of the Bank of England weakening its mortgage affordability stress testing. Knight Frank have added growth to their 2022 figure and kept subsequent years unchanged. The consensus overall five-year view remains for relatively low growth, particularly considering the inflation expectations over at least the first two years of that period. The OBR’s central scenario is unchanged from last quarter (updated in April).

Table 2 – UK House Price Forecasts

ForecasterLast updated20222023202420252026Annual average
OBR*Apr-22+4.3%+0.8%+1.9%+2.7%+3.2%+2.6%
SavillsJul-22+7.5%-1.0%+3.0%+3.5%+3.5%+3.3%
JLLNov-21+4.5%+4.5%+3.0%+3.5%+4.5%+4.0%
Knight FrankJun-22+8.0%+1.0%+2.0%+2.0%+3.0%+3.2%
Source: Forecasters’ websites and publications
*OBR central scenario

Market outlook

House prices are still booming but the rising cost of living and increasing interest rates are starting to hurt. The market is still benefiting from the boom in buyers and a lack of stock but there are some potential signs of stress starting to appear. While the cost of living crisis is hurting those at the lower end of the income distribution most and rising rates will hit potential buyers rather than existing owners, the squeeze is only going to increase in coming months. The autumn could mark the turning point for the housing market.

While there are no signs of an imminent crash, the market is clearly very sensitive to relatively small interest rate rises. But this situation is still more likely to lead to a downwards turn in activity rather than prices, at least in the short-term. With existing owners under no pressure to sell and with price expectations firmly set by the recent boom, many will sit tight rather than meet the more constrained affordability of potential buyers.

Contact

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Einar Roberts

Partner, residential consultancy

Head office

T +44 (0) 7889 634 033
Einar Roberts
Contact

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James Hyman

Partner, residential investment

Head office

T +44 (0) 20 7407 3669
James Hyman, head of residential agency, Cluttons