- The Land Registry/ONS report house prices rose 1.2% month-on-month (m/m) in December, causing the annual increase to reach a more-than six-year high of 8.5% (up from 7.1% in November)
- Prices in London fell 1.1% m/m in December; the annual rate of increase halved to 3.5% from 7.0% in November (the highest since September 2016)
- House prices have strengthened and housing market activity has been buoyed by the release of pent-up demand following the easing of restrictions from mid-May last year, people re-assessing their housing needs, and the temporary raising of the Stamp Duty threshold
- Despite the robust December figures from the Land Registry/ONS, there are signs in the most recent data that house prices are now coming off the boil
- The EY ITEM Club continues to believe that the recent robustness of housing market activity and the strength of prices will prove unsustainable sooner rather than later – particularly with the support to activity coming from the extension of the Stamp Duty threshold to 31 March starting to wane
- The housing market is likely to come under mounting pressure in the near term as the economy continues to be affected by COVID-19 restrictions and with a potentially significant rise in unemployment ahead, despite the furlough scheme being extended until April. The effect of pent-up demand on housing market activity is also likely to fade
- The EY ITEM Club suspects that house prices could fall by around 5% over 2021
- The EY ITEM Club expects housing market activity to gradually improve late on in 2021, allowing prices to stabilise as the UK’s economy establishes a sustained firmer footing and the labour market comes off its lows, supported by the roll-out of the COVID-19 vaccines. Very low borrowing costs should also help, with the Bank of England unlikely to lift interest rates from 0.10% during 2021 and for some time thereafter
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The Land Registry/ONS reported that the year-on-year increase in house prices rose to 8.5% in December – the highest level since October 2014. This was up from 7.1% in November, 5.8% in October, 4.4% in September, 2.7% in August and 1.8% in July. It has picked up from a low of 0.7% in April 2020.
“House prices rose an unadjusted 1.2% month-on-month in December. This followed month-on-month increases of 0.9% in November and 1.1% in October. Prices had edged down 0.1% month-on-month in December 2019.
“London prices fell 1.1% month-on-month in December, however, after rising 1.8% in November. The annual rate of increase halved to 3.5% in December from 7.0% in November, which had been the highest level since September 2016.
“The Land Registry/ONS measure of house price inflation lags many of the other measures as it is based on mortgage completions. The ONS has observed that, typically, a house purchase can take six to eight weeks to reach completion.”
Latest Nationwide and Halifax data indicate house prices are coming off the boil
Howard Archer continues: “Latest data from both Halifax and Nationwide suggest that house prices may be starting to come off the boil. Halifax reported that house prices fell 0.3% month-on-month in January, which was the first monthly fall in house prices on their measure since last May and the largest since April. It followed a flat performance in December. Prior to this house prices had risen for five months running, including a gain of 1.0% in November. The year-on-year gain in house prices moderated to a five-month low of 5.4% in January from 6.0% in December and 7.6% in November, which had been the highest level since June 2016.
“Additionally, Nationwide reported house prices dipped 0.3% month-on-month in January, which was the first monthly decline on that measure since last June and followed four successive 0.8-0.9% monthly increases through to December. The year-on-year change in house prices moderated to 6.4% in January from 7.3% in December, which was the highest level since November 2014.”
“Other survey evidence suggests the latest lockdown has added to slowing pressures. The January RICS residential monthly survey reported that ‘results point to a generally weaker trend in activity across the sales market to open the year. Comments left by survey contributors suggest that, although agents have been permitted to remain open during the third national lockdown, the overall situation around the pandemic at present is deterring would-be buyers and vendors.’ The survey revealed that buyer enquiries fell in January for the first time in eight months while new properties coming on to the market declined for the first time since May. There was also a fall in agreed sales in January.
“The marked strength in house prices to-date has occurred amid a strong pick-up in housing market activity after the lows seen in April and May. Housing market activity in the UK picked up from May onwards after the initial lockdown restrictions that were introduced on 23 March were eased. There was an immediate pick-up in housing market activity as pent-up activity was released.
“This lift was then reinforced by the raising of the Stamp Duty threshold to £500,000 from mid-July until 31 March 2021.
“Additionally, Nationwide has observed that, ‘behavioural shifts may also be boosting activity, as people reassess their housing needs and preferences as a result of life in lockdown.’ In particular, it appears that an increasing number of people want a garden and also space to work at home. This is leading to some polarisation in demand for residential properties.
“Latest data from the Bank of England show that mortgage approvals for house purchases edged back to a still highly elevated 103,381 in December after rising for six successive months to 105,324 in November – the highest since August 2007. This was up from 98,195 in October, 92,402 in September, 86,174 in August and a record low of 9,358 in May. Despite edging back from November’s peak level in December, mortgage approvals for house purchases were still at the second highest level in more than 13 years.
Outlook for the UK housing market
Howard Archer adds: “The EY ITEM Club continues to believe that elevated housing market activity and robust prices will prove unsustainable sooner rather than later.
“The support to the housing market coming from the rise in the Stamp Duty threshold through to 31 March is now starting to wane. There are reports that the Chancellor does not intend to extend the raising of the Stamp Duty threshold in the 3 March Budget.
“The EY ITEM Club believes that the housing market is likely to come under mounting near-term pressure as the economy continues to be affected by major restrictions in most areas, while there may well still be a significant rise in unemployment despite the furlough scheme being extended until April. Meanwhile, earnings growth looks likely to be limited and there is also likely to be a fading of the pent-up demand effect on housing market activity.
“Consequently, the EY ITEM Club suspects that house prices fall by around 5% over 2021.
“The EY ITEM Club expects housing market activity to gradually improve late on in 2021 allowing prices to stabilise as the UK’s economy establishes a sustained firmer footing and the labour market comes off its lows, supported by the roll-out of the COVID-19 vaccines. Very low borrowing costs should also help with the Bank of England unlikely to lift interest rates from 0.10% during 2021 and for some time thereafter.”