Forecasts & outlook Q3 2020
Experian’s latest house price forecasts for Cluttons are shown in the table below, based on their central economic scenario of a ‘delayed V-shape’, which sees UK GDP recover to pre-pandemic levels at the start of 2022.
As we noted previously, house price forecasts are likely to be subject to significant changes as new economic and health data emerges, and Experian have made major revisions to both the UK and Prime Central London figures this quarter. At national level, house prices have defied the economic gloom and are set to finish the year up by almost 5%. While the momentum is likely to slow next year, Experian do not expect any falls over the five-year forecast horizon.
PCL is a very different story. The Cluttons index reported large falls in Q3 for both capital values and rents. Experian now expect further falls in Q4 and continuing weakness in Q1 2021, before a relatively strong bounce-back next year from the second quarter. The downside risks to this outlook are clear: no Brexit trade deal or a worsening of the pandemic could result in a double-dip recession and slower recovery. Looking at prime property more specifically, the introduction of an additional tax burden for international buyers from April will put more pressure on the PCL sales markets.
A sample of house price forecasts from the October release of the HM Treasury comparison report are shown in Figure 1, compared against their equivalents from July. Unlike GDP forecasts, as the pandemic has progressed the figures have not converged around a consensus, with some forecasters now more optimistic on house prices compared to three months ago, and some much more negative, even for the 2020 figures.
A selection of the latest forecasts from other property consultancies are shown in the table below, along with the central scenario from the OBR.
Risks and Opportunities
For 2020 the picture at national level is relatively clear, with the pandemic boosting demand as buyers re-evaluated their housing needs and traded location for space. The stamp duty holiday appears to have been very premature, and indeed the main question in the short term is whether conveyancers and valuers can work through the backlog of agreed sales (and keep pace with the continued high levels of activity) and get deals done before the holiday ends in March.
Assuming the holiday is not extended, sales volumes could face a ‘cliff edge’ scenario and drop dramatically from April, as they have in past examples of tax changes. At this time there may be continued negative economic impacts (from either the pandemic or a no-deal Brexit), leading to ‘forced sales’ from homeowners and investors in financial distress. Very low turnover means that these sales could start to negatively influence price indices and confidence in the market.
Factors supporting the market include continuing low interest rates and further quantitative easing (QE), but it is unclear whether more can be done with these levers in the event of a severe downturn.
Outside the obvious risks mentioned above, the possibility of new or increased property or wealth taxes remains on the horizon. The pandemic has reduced tax revenues significantly and required many tens of billions of pounds of emergency spending, so the public finances will need to be built back up. As mentioned last quarter, reducing or removing the Capital Gains Tax exemption for main residences are one option, but this could have major implications for the property market and wider economy going forward.