Forecasts & outlook Q4 2021

The economy continues to recover and GDP finally returned to pre-pandemic levels in Q4. More expansion is expected in 2022, but cost of living pressures are likely to limit growth in the short term.

The double-digit house price growth seen in 2021 at national level is not sustainable; rises will be much more limited this year for the UK market. Central London values and rents are expected to grow very strongly this year.

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 2.4% this year.

Table 1 – Experian House Price Forecasts, February 2022

Table 1 – Experian House Price Forecasts, February 2022

Source: Experian. * Baseline economic scenario assumes no further Coronavirus restrictions in 2022.

UK house price growth of 1.8% is forecast for 2022 by Experian. They also expect inflation to reach 3.8%, so this would see real terms falls in values. Over the full five years, the forecast is for house price growth of around 18%, compared to inflation of 12%. The slowing of growth compared to the last two years is driven mainly by limited real income growth and increasing mortgage rates.

The labour market appears to have got through the worst of the pandemic relatively unscathed, based on the headline figures of 4.1% unemployment and 400,000 more payrolled employees compared to pre-pandemic. However, Experian expect a delayed impact from the end of furlough support, with unemployment rising in Q2 just as inflation peaks and combining for a poor outlook for consumer spending. With higher mortgage rates too, worsening affordability will limit the scope for significant house price inflation. Further into the forecast period, inflation will stabilise and a return to controlled growth is expected.

The Central London sales and rental markets are set for a very different path to the wider UK situation. Capital values rose slightly in Q4 and Experian forecast that growth will accelerate in 2022 and 23, to 7.4% then 5.5%. This would recover the falls seen in 2020. After rapid growth in 2021, the rental market is already back at pre-pandemic levels, but further rises are expected, with forecasts for 2022 and 23 of +7.0% and +3.3%.

The strong growth forecasts for prime property are driven by international buyers and tenants increasingly returning to the market, and a pick-up in investment appetite more widely as the uncertainty of the pandemic starts to reduce.

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 15 months is shown in Figure 1. There is a clear consensus that growth will be slower this year; all the forecasts are below 2021’s performance. Within this, a relatively wide range of values are currently being forecast, from +7.6% to -1.5%, reflecting that there is still a significant level of uncertainty in the economic outlook.

Figure 1 – 2022 UK house price forecast trend

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)

Some of the forecasts from other property consultancies were also updated in Q4, moving to the 2022-26 period. In general, all the forecasters relatively lower, more stable growth compared to the last few years, approximately in line with inflation expectations. The OBR’s central scenario from October remains unchanged and is broadly in line with the consultancies’ figures. 

Table 2 – UK House Price Forecasts

Table 2 – UK House Price Forecasts

Source: Forecasters’ websites and publications. *OBR central scenario. ^2022-26 forecast not yet published, figures from 2021-25.

2022 Outlook

While the economy has finally recovered to pre-pandemic levels and further pandemic restrictions seems unlikely, there are many headwinds brewing that could limit growth and negatively impact on the housing market.

Inflation is well over its 2% target and set to rise further. Unemployment has been kept under control through furlough and other support, but is forecast to rise in Q2, with energy price and tax rises hitting at the same time. Interest rates will rise as the Bank of England has signalled further increases through the year.

Overall, it is therefore unlikely that this year will see house price growth or transaction levels matching 2021. A significant correction is also unlikely, as even if the base rate rises sharply a majority of homeowners either own outright or are on fixed rate mortgages, increasingly five-year deals. This insulates them from rising costs and means large numbers of forced sales are improbable.

A more plausible path is therefore values plateauing near current levels, as affordability worsens for new buyers and vendors will have less temptation to sell unless they have to move. This feeds in to transactions falling back from 2021’s spike, despite buyer demand remaining relatively strong.