Forecasts and outlook Q3 2022

The recent political upheavals have exacerbated the uncertainty around the UK’s economic outlook.

But behind the headlines, housing data has for some months been pointing to a slowing market after several years of record-high activity.

Over the last two years the mainstream UK sales market has strongly outperformed central London, but it is the wider mainstream market which is likely to feel the biggest impact as mortgage rates rise and cost-of-living pressure on households continues to grow.

In the rental market, high levels of demand across all markets will support rental growth, although the rate of rental increases will likely ease from current levels.

House price forecasts

Experian’s latest house price forecasts for Cluttons are shown in the table below. The longer-term outlook (to 2026) will be reviewed in the period following the Budget 17 November.

Table 1 – Experian House Price Forecasts, as of October 2022

2022 forecast
UK house prices+6.4%
Prime Central London house prices+0.2%
Prime Central London rents+16.0%
Source: Experian

Average house prices across the UK are expected to register +6.4% growth by the end of the year. This is an upgrade on the previous forecast in Q2 (+4.6%), reflecting the continuing strong year-to-date performance, but marks a slowdown from the current growth rate of more than 7%. These figures are part of a baseline scenario that sees the economy move into recession after quarterly falls in GDP in both Q3 and Q4 this year. Inflation at the year-end is forecast to reach more than 11%, so even this upgraded forecast represents a fall in values in real terms.

Prime central London sales values are expected to finish the year largely unchanged, with weaker buyer demand offset by an ongoing lack of stock supporting prices. The forecast for rental growth has seen a significant upgrade – to 16% – following the rises seen over the summer. Demand for rental property remains very high, with little sign of this dropping off in the short to medium term.

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 price growth, 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 strength of the housing market over the summer. The median forecast for 2022 growth is now 6.2%, 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)

The Office for Budget Responsibility’s central scenario for the growth in mainstream UK house prices in unchanged from Q3 (it was last updated in April but will likely be reviewed ahead of the Budget on November 17).

Table 2 – UK house price forecasts

ForecasterLast updated20222023202420252026Annual average
OBR*Apr-22+4.3%+0.8%+1.9%+2.7%+3.2%+2.6%
Source: *OBR central scenario

Market outlook

Interest rates (and market expectations for their future path) have been rising all year. The corresponding rise in mortgage rates was increasingly expected to lead to a slowdown in the housing market which has been operating at record-high levels for several years, with 1.5 million transactions last year, and record levels of demand. A period of readjustment was expected, although the increase in mortgage rates in the wake of the ‘mini budget’ of 23rd September, accelerated the process.

Even a full reversal of the ‘mini-budget’ policies – something which appears to be taking place under the new Prime Minister and Chancellor but which is likely to be confirmed at the Budget, is likely to see borrowing costs remain inflated to some extent as the political situation has introduced an additional risk premium to the UK economy. The path the market takes from here depends on what moves the policymakers choose and what impact that has on household incomes, inflation and interest rates.

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Gráinne Gilmore

Director of research and insights

T +44 (0) 20 7647 7142
Gráinne Gilmore, director of research & insights, Cluttons