- The Land Registry/ONS report house prices fell 0.5% month-on-month (m/m) in January, causing the annual increase to moderate to 7.5% from a four-and-a-half year high of 8.0% in December
- Prices in London edged up 0.1% m/m in January, a 5.3% increase year-on-year (y/y)
- House prices strengthened over the second half of 2020 as housing market activity increased with the release of pent-up demand
- The January Land Registry/ONS data add to signs that house prices have come off the boil early on in 2021, although the evidence is not conclusive
- The EY ITEM Club now expects house prices to be flat over 2021 rather than contract by 5%. Nevertheless, some quarter-on-quarter decreases in house prices are expected at the end of 2021 and start of 2022
- The EY ITEM Club believes that the strengthening of the housing market has been outsized relative to the economic fundamentals, and the strength of prices will prove unsustainable
- Nevertheless, the housing market is likely to benefit in the near-term from the Stamp Duty threshold extension, the low-deposit mortgage guarantee scheme, and the extension of the furlough scheme which has led to a lower increase in unemployment than previously expected
- Housing market activity and prices may see pressure over the final months of 2021 and the early months of 2022 as the Stamp Duty benefit ends, unemployment rises and pent-up demand wanes, as well as growing expectations that interest rates could begin to rise.
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 eased back to 7.5% in January after rising to 8.0% in December, which had been the fastest rate since June 2016. This was up from 7.1% in November, 5.5% in October, 3.9% in September, 2.6% in August and 1.8% in July. It has picked up from a low of 0.8% in April 2020.
“House prices decreased by an unadjusted 0.5% month-on-month in January. This followed month-on-month increases of 0.9% in December and 1.1% in November. Prices had edged up 0.1% month-on-month in January 2019.
“London prices increased by 0.1% month-on-month in January as they had done in December, while the annual rate of increase rose back up to 5.3% in January after falling to 4.5% in December from 6.7% in November – this had been the highest since September 2016.
“It must be noted that 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 offer mixed evidence on whether house prices are coming off the boil
Howard Archer continues: “Latest data from Halifax and Nationwide offer mixed evidence as to whether house prices may be starting to come off the boil. Halifax reported that house prices edged down 0.1% month-on-month in February, following a fall of 0.4% in January. These were the first monthly declines in house prices reported by Halifax since last May. The year-on-year gain in house prices moderated to a six-month low of 5.2% in February from 5.4% in January, 6.0% in December and 7.6% in November – the highest since June 2016.
“However, Nationwide reported house prices rebounded 0.7% month-on-month in February after dipping 0.2% in January, which was the first monthly drop on that measure since last June. The year-on-year change in house prices rose back up to 6.9% in February after moderating to 6.4% in January from 7.3% in December, which had been the highest since November 2014. Nevertheless, the three-month/three-month growth rate in house prices did moderate to 1.9% in February, which was the lowest since last September and down from 2.3% in January, 3.0% in December and a peak of 3.7% in November."
Housing market activity has been buoyant but some indications it was starting to slow before budget measures
Howard Archer continues: “The strength in house prices has occurred amid a pick-up in housing market activity after the lows seen in April and May 2020. Activity picked up from May onwards after initial lockdown restrictions were eased and pent-up activity was released.
“This lift was then reinforced by the raising of the Stamp Duty threshold from £125,000 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 eased back to a still highly elevated 98,994 in January from 102,809 in December and 105,009 in November, which had been the highest since August 2007. Mortgage approvals for house purchases had previously risen for six successive months through to a more than 13-year high in November from a record low of 9,370 in May 2020. Despite easing back in January, mortgage approvals for house purchases were still at the third highest level in more than 13 years.
“However, survey evidence suggests housing market activity had started to lose momentum, at least until additional supportive measures were announced in the 3 March Budget. The February RICS residential monthly survey revealed that buyer enquiries fell for a second month running in February after rising over the previous seven months, while new properties coming on to the market also declined for a second successive month after rising through the second half of 2020. Newly agreed sales were flat in February after falling in January.”
Outlook for the UK housing market
Howard Archer comments: “The EY ITEM Club now expects house prices to be flat over 2021 rather than contract by 5%. Nevertheless, some quarter-on-quarter falls in house prices are expected at the end of 2021 and start of 2022. The strengthening of the housing market has been outsized relative to economic fundamentals, and the strength of prices will prove unsustainable.
“The support to the housing market coming from the original rise in the Stamp Duty threshold through to 31 March had recently started to wane, and there were some signs that activity could be easing back from its highs with house prices starting to come off the boil.
“However, near-term support has come from the Chancellor extending the full Stamp Duty threshold increase from end-March to end-June and then partially to end-September. The introduction of a mortgage guarantee scheme for people with low deposits is also likely to provide some support for the housing market, with further help from the extension of the furlough scheme to the end of September leading to unemployment rising less than previously expected.
“Nevertheless, housing market activity and prices may see pressure over the final months of 2021 and the early months of 2022 as the Stamp Duty benefit ends, unemployment rises and pent-up demand wanes. Housing market activity may also be may also be affected by growing expectations that interest rates could begin to rise.”