5 minute read 21 Jun 2022

The UK housing market is set to remain buoyant, with prices continuing to rise — but its strength will raise difficult policy decisions.

EY Portrait of family playing in park

Why UK house price rises are continuing despite economic challenges

Authors
Hywel Ball

EY UK Chair and UK&I Managing Partner, Ernst & Young LLP

UK Chair and UK&I Managing Partner. Leading our 17,000 people in the UK. FTSE 100 audit partner. Father of three and Welsh rugby fan.

Peter Arnold

EY UK Chief Economist

A passionate leader and trusted advisor. Over 20 years of experience in economic policy, regulation and competition. Optimising client strategies through the use of analytics and economic analysis.

Contributors
5 minute read 21 Jun 2022

The UK housing market is set to remain buoyant, with prices continuing to rise — but its strength will raise difficult policy decisions.

In brief
  • The UK housing market has exceeded most expectations, with ‘real’ prices rising by 8% from April 2020 to March 2022 against GDP growth of just 1.2%.
  • Despite reduced government support, squeezed household spending and rising interest rates, EY ITEM Club project house prices will keep rising through 2023 and 2024.
  • Ongoing rises in house prices impose some economic costs — and the government will ultimately need to address the structural issues in the market.

Since 2020, the UK housing market has confounded many commentators’ expectations. When the pandemic began in early 2020, there was a widespread expectation that house prices would crash. Instead, the reverse came about. As of March 2022, the average UK property was worth £279,000 — that is some £48,000, or 21% higher than in February 2020. This translates into ‘real’ price growth — adjusted for wider inflation — of 8%, compared to a rise of just 1.2% in real gross domestic product (GDP) over the same period. Following initial declines during 2020 and 2021, the number of transactions and mortgage approvals also recovered strongly to above their immediate pre-pandemic levels.

A market buoyed by government support

The housing market’s unexpected strength was largely due to government support — especially the Mortgage Guarantee Scheme and the temporary extension of the nil-rate band on Stamp Duty Land Tax to £500,000, along with more general support to the economy through the furlough scheme. The Bank of England also helped by cutting interest rates to 0.1%, bringing down mortgage costs. What is more, the biggest impacts of COVID-19 were on the younger and lower paid, whilst the better off — more likely to be homeowners — were often able to build savings that could act as deposits on a new home. 

Despite cost-of-living pressures, prices will keep rising

With government support now dialled down, interest rates rising and concerns growing over the cost of living, fears have been voiced that the housing market may be facing a day of reckoning. However, the EY ITEM Club believes a downturn is unlikely. Instead, we are projecting that house prices will rise by 8% in 2022, before moderating through 2023 and 2024 — albeit staying positive at 1.8% and 1.2% respectively.

EY ITEM Club special report on the housing market

8%

Projected growth in UK house prices in 2022 — before slowing to 1.8% in 2023 and 1.2% in 2024.

Three factors fostering continued growth

There are reasons for such optimism. First, previous sharp corrections in house prices have usually coincided with steep rises in unemployment, boosting ‘forced’ sales. Currently, the labour market remains strong, with the unemployment rate at its lowest for half a century.

Second, whilst higher interest rates should theoretically push prices down, this effect is likely to be far less pronounced than in the past. Recent shifts, such as a decline in the proportion of homeowners with a mortgage and the growing dominance of fixed-rate mortgages, will act to cushion the impact of rising rates on prices. Furthermore, since homeowners tend to be higher earners, many will have built a savings buffer during the pandemic.

Third, there are several longer-term structural issues at play in the UK housing market — primarily on the supply side. One is that the supply of new-build housing has long struggled to keep up with population growth. But perhaps more significantly, a combination of people living longer and older owners having little incentive to downsize means the average ownership tenure has lengthened, reducing the number of existing houses coming onto the market at the top end.

With older people less likely to sell their often-higher value properties than in the past and buy-to-let landlords — who tend to hold rather than sell — accounting for a growing share of homes at the bottom end, the market has become disorganized. The 1.49 million residential property transactions conducted in 2021 — the highest since the Global Financial Crisis (GFC) of 2008–09 — was still 4% down on the average for the decade leading up to the GFC.

Difficult political and policy challenges to address

All of this highlights the political and policy challenges now surrounding the UK housing market. A sharp fall in house prices would create significant economic damage, as so much household wealth is tied up in housing. However, the prospect of ever higher house prices also presents significant economic costs. It means buyers need to take on more debt to buy a home, leaving the economy more vulnerable to a financial crisis. Expensive housing directs investment into construction. If people are spending large sums on housing, they have less to spend in other sectors.

Furthermore, property’s attractiveness as an asset class diverts household savings into property, rather than more productive businesses. There are also obvious questions about equity and inequality — not least between older, wealthier homeowners and younger, lower-paid renters.

The result is a set of complex political choices. The solutions — building more homes, changing the tax system to disincentivise buy-to-let or second homes, or encouraging downsizing — are politically unpopular. But the status quo is becoming ever less sustainable and brings longer-term political costs that must also be considered.

Summary

Over the course of the past two years, there have been many predictions that the UK housing market was heading for a fall. But it has seemingly defied all odds, with house prices continuing to far outpace wider economic growth. While households are now facing rising interest rates and cost-of-living pressures, we do not expect these headwinds to derail the market’s momentum, with price rises set to continue into 2024 — albeit at a slowing pace. But challenges remain — not least for the Government, which faces tough choices in tackling structural problems to make the housing market more sustainable.

About this article

Authors
Hywel Ball

EY UK Chair and UK&I Managing Partner, Ernst & Young LLP

UK Chair and UK&I Managing Partner. Leading our 17,000 people in the UK. FTSE 100 audit partner. Father of three and Welsh rugby fan.

Peter Arnold

EY UK Chief Economist

A passionate leader and trusted advisor. Over 20 years of experience in economic policy, regulation and competition. Optimising client strategies through the use of analytics and economic analysis.

Contributors