- The Land Registry/ONS report house prices were flat month-on-month in February, with the annual increase rising to 8.6% – the fastest rate since October 2014.
- House prices strengthened 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 last year, people re-assessing their housing needs in the wake of lockdowns and the temporary raising of the Stamp Duty threshold.
- However, while still relatively elevated, housing market activity had come off its highs early on in 2021 – before the Chancellor announced supportive measures in the Budget on 3 March.
- Latest survey evidence suggests that the Chancellor's Budget measures have given the housing market renewed impetus. The extension of the furlough scheme will also likely help the housing market.
- The EY ITEM Club now believes the housing market is likely to see near-term vigour and some modest firming of prices – even though it suspects the recent strength of the housing market has been outsized relative to the economic fundamentals, and the strength of prices will ultimately prove unsustainable.
- The EY ITEM Club suspect house prices will be flat year-on-year by early 2022. Some quarters of falling prices are likely at the end of 2021 and early on in 2022 as the Stamp Duty benefit ends, unemployment likely rises, pent-up demand wanes, and amid 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 rose to 8.6% in February – the fastest rate of growth since October 2014. This was up from 8.0% in January and 7.7% in December. The annual increase in house prices has climbed from a low of 0.7% in April 2020.
“House prices were flat month-on-month unadjusted in February. They had previously risen 0.3% month-on-month in January following increases of 0.7% in December and 1.2% in November. Prices had dipped 0.6% month-on-month in February 2020.
“London prices dipped 1.4% month-on-month in February after rising 0.9% in January. Meanwhile, the annual rate of increase fell back to 4.6% in February after rising to 5.8% in January from 4.1% in December. It had peaked at 6.4% 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.”
Housing market activity has been buoyant but was slowing before March budget measures
Howard Archer continues: “The recent marked strength in house prices occurred amid a strong pick-up in housing market activity through the second half of 2020 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 2020 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 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.
“However, it is evident that housing market activity had come off its highs before the Chancellor announced supportive measures in the Budget on 3 March.
“The Bank of England reported that mortgage approvals for house purchases eased back for a third month running in February, and at an increased rate, but they were still at a historically elevated level. Mortgage approvals for house purchases dipped to a six-month low of 87,669 in February from 97,350 in January, 101,252 in December and 103,708 in November, which had been the highest since August 2007. Approvals had previously risen for six successive months through to November’s more than 13-year high from a record low of 9,432 in May 2020. Despite easing back, February approvals for house purchases were still at the sixth highest level in more than 13 years.
“Initial survey evidence suggests that the Budget measures have given the housing market renewed life. For example, the March RICS residential monthly survey revealed that all activity elements strengthened including buyer enquiries, new properties coming on to the market and newly agreed sales. Additionally, Rightmove reported a marked pick up in housing market activity in April and higher asking prices."
Outlook for the UK housing market
Howard Archer comments: “Following the Chancellor's introduction of more supportive measures in the Budget, including the mortgage guarantee scheme and extension of the Stamp Duty threshold increase, the EY ITEM Club now expects the housing market to show vigour in the near term and a modest firming of prices. The market will also likely be helped by the extension of the furlough scheme to the end of September and the fact that unemployment is not likely to rise as much as expected at the outset of the pandemic.
"However, the EY ITEM Club is doubtful that this will be sustained for long as the strengthening of the housing market has been outsized relative to economic fundamentals.
“The EY ITEM Club suspects house prices will be flat year-on-year by early 2022. Some quarters of falling prices likely at the end of 2021 and early on in 2022 as the Stamp Duty benefit ends, unemployment rises and there is a waning of pent-up demand. Housing market activity may also be affected from the latter months of 2021 by growing expectations that interest rates could start to rise before long.”