- Nationwide reported house prices saw a further strong increase of 1.8% month-on-month in May after rising 2.3% in April
- The year-on-year gain in house prices climbed to 10.9% in May (the highest since August 2014) from 7.1% in April and 5.7% in March
- The housing market is seeing renewed impetus after new supportive measures were included in the Budget in early March, including an extension of the Stamp Duty threshold increase and a low-deposit mortgage scheme. The extension of the furlough scheme will also likely help the housing market. Prior to these new measures, housing market activity and prices had been showing signs of coming off the boil after strengthening through the second half of 2020
- The EY ITEM Club believes the housing market is likely to see near-term vigour and further firming of prices. The firming of prices may be reinforced by a current relative shortage of properties for sale compared to demand
- Nevertheless, the EY ITEM Club believes the strength of the housing market is outsized relative to economic fundamentals, and the level of price increases will ultimately prove unsustainable
- The EY ITEM Club suspects house prices will lose momentum again later on this year and could well be flat year-on-year by mid-2022 with some quarters of falling prices
- Housing market activity and prices are expected to be increasingly pressurised over the final months of 2021 and the early months of 2022 as the Stamp Duty benefit ends, unemployment likely rises modestly and pent-up demand wanes. There may well also be growing expectations that interest rates could begin to rise.
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“Nationwide reported that house prices rose a strong 1.8% month-on-month in May. This followed a rise of 2.3% month-on-month in April, which had been the largest monthly increase since February 2004.
“Prior to the increases in May and April, house prices had been relatively soft over the first quarter of 2021. They dipped 0.3% month-on-month in March, rose 0.8% in February, and dipped 0.1% in January – this had been the first monthly fall in house prices since last June.
“House prices had seen a marked pick-up through the latter months of 2020 as they recorded month-on-month increases in the range of 0.9%-2.0% for six months running between July and December.
“The year-on-year change in house prices climbed to 10.9% in May. This was the highest annual increase since August 2014 and was up from 7.1% in April and 5.7% in March. It had earlier moderated to March’s level from a previous peak of 7.3% in December. December’s increase was up from 1.5% in July 2020 and a dip of 0.1% year-on-year in June, which had been the first annual decline in house prices since December 2012.”
Housing market activity has been buoyant but was slowing before March Budget measures
Howard Archer continues: “The recent strength in house prices has occurred after a strong pick-up in housing market activity through the second half of 2020. This followed the easing of the initial 23 March 2020 lockdown restrictions and the release of pent-up activity.
“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 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, while still being relatively elevated, housing market activity had come off its highs before supportive measures were included in the Budget on 3 March.
“The Bank of England reported that mortgage approvals for house purchases eased back for a fourth month running in March to be at an eight-month low of 82,735 in from 87,385 in February and 103,126 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 9,486 in May 2020.
“The latest survey evidence suggests the Budget measures have given the housing market renewed life.
“For example, the April RICS residential monthly survey revealed that buyer enquiries strengthened across all regions. 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 introduction of more supportive measures in the Budget, the EY ITEM Club expects the housing market to show vigour in the near term and a further firming of prices.
“The housing market will get near-term support from the extension of the full Stamp Duty threshold increase 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, which will also be helped by unemployment rising less than previously expected. This will be down to the extension of the furlough scheme to the end of September as well as a robust recovery developing from the second quarter.
“House prices may also be lifted in the near term by a current relative shortage of properties available compared to demand.
“However, the EY ITEM Club is doubtful that this will be sustained for an extended period as it says the strengthening of the housing market has been outsized given economic fundamentals.
“The EY ITEM Club suspects house prices will lose momentum again later on this year and could well be flat year-on-year by mid-2022 with some quarters of falling prices. Housing market activity and prices are seen becoming increasingly pressurised over the final months of 2021 and the early months of 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.”