- Nationwide reports a 0.7% month-on-month (m/m) house price increase in February which dilutes recent signs that UK house prices could be starting to come off the boil
- Nationwide reported a 0.2% fall in January which had been the first monthly dip since last June. The year-on-year (y/y) gain rose back up to 6.9% in February after falling to 6.4% in January from 7.3% in December (the highest since November 2014)
- Nevertheless, the three-month/three-month growth rate in house prices moderated to 1.9% in February, the lowest since last September and down from 2.3% in January, 3.0% in December and a peak of 3.7% in November
- House prices strengthened markedly over the second half of 2020 as housing market activity was buoyed by the release of pent-up demand following the easing of restrictions from mid-May 2020, people re-assessing housing needs in the wake of lockdowns and the temporary rise in the Stamp Duty threshold
- The EY ITEM Club believes that the strengthening of the housing market has been outsized relative to economic fundamentals and the strength of prices will prove unsustainable sooner rather than later – although activity and prices may get some near-term support if the Chancellor extends the Stamp Duty threshold increase from in the Budget
- The strengthening of the housing market has occurred despite the contraction in the UK economy over 2020 and rising unemployment. The economy looks headed for clear contraction in Q1 2021
- While the economy is expected to see a decent recovery start from Q2, unemployment is likely to rise further despite an expected extension of the furlough scheme. Pay growth is also likely to be limited over the coming months. Meanwhile, the impact of pent-up demand on housing market activity is also likely to fade.
- The EY ITEM Club suspects that house prices could end up declining around 3% over 2021. A fall of 5% had been forecast but this has been revised given the expected housing market measures in the upcoming Budget.
- 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. 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:
“Nationwide reported house prices regained momentum in February as they rose 0.7% month-on-month. Prices had previously fallen 0.2% month-on-month in January, which had been the first monthly fall in house prices since June and followed four successive monthly gains of 0.8-0.9% between September and December, including 0.9% in December.
“The year-on-year change in house prices rose back up to 6.9% in February after falling to 6.4% in January from 7.3% in December, which had been the highest since November 2014. The annual rate of increase had previously climbed to December’s peak of 7.3% from 1.5% in July and a dip of 0.1% year-on-year in June which had been the first annual decline in house prices since December 2012.
“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. This had been the strongest three-month/three-month gain since October 2009.”
Latest Halifax data have suggested housing prices could be coming off the boil
Howard Archer observes: “Latest data from Halifax suggested that house prices could be coming off the boil. Halifax reported that house prices fell 0.3% month-on-month in January. This was the first monthly fall in house prices reported by Halifax 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 since June 2016.”
Housing market activity has been buoyant but has edged back from its peak level
Howard Archer says: “The marked strength in house prices 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 easing of the initial nationwide lockdown restrictions that were introduced on 23 March. 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 pushing activity up, with people reassessing their housing needs as a result of lockdown. 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 November’s more than 13-year high from a record low of 9,370 in May 2020. Despite easing back further from November’s peak level in January, mortgage approvals for house purchases were still at the third highest level in more than 13 years.
“Other recent survey evidence suggests housing market activity may be starting to lose momentum, with the latest lockdown adding to slowing pressures. The January RICS residential monthly survey reported a ‘generally weaker trend in activity’ and that the pandemic 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.”
Outlook for the UK housing market
Howard Archer adds: “The EY ITEM Club has frequently expressed belief that the current 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 has recently started to wane. However, there are reports that the Chancellor will extend the raising of the Stamp Duty threshold to the end of June in the Budget. There have also been suggestions of a mortgage guarantee scheme to help people with small deposits get on to the property ladder.
“While an extension of the Stamp Duty threshold to the end of June would likely provide near-term support to housing market activity and prices, the EY ITEM Club still believes that the housing market is likely to come under mounting over the coming months. The EY ITEM Club believes that the recent marked strengthening in the housing market has been disproportionate given the economy’s contraction over 2020 and rising unemployment.
“After contracting in the first quarter, the economy looks set to see decent recovery develop from the second quarter as restrictions on activity are gradually eased. Nevertheless, unemployment is likely to keep rising gradually despite an expected further extension of the furlough scheme from the end of April in the Budget.
“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 will fall by around 3% over 2021. This had been revised from an expected decline of 5% given the housing market measures expected in the Budget.
“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. 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.”