- A 1.1% month-on-month rise in Halifax’s measure of house prices in December capped off a strong year. Prices grew 9.8% in the year to December, the fastest annual rise since July 2007.
- The end of the stamp duty holiday has been followed by signs of the housing market returning to more normal levels of activity. And the fundamentals facing the market are looking less supportive of continued growth in prices. Higher inflation and tax rises will affect households’ spending power and mortgage rates are likely to rise in response to the Bank of England’s decision to increase the policy rate. Moreover, pandemic-driven changes in housing preferences, and the resulting boost to demand, are likely to fade over time.
- But mortgage rates will be increasing from a very low level. Unemployment is low and households, overall, are still sitting on substantial unplanned savings accumulated during the pandemic. So, while the EY ITEM Club expects house price growth to decelerate significantly this year, an outright fall in prices is unlikely.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“Halifax’s measure of house prices in December mirrored its Nationwide counterpart by revealing a strong end to 2021, despite the situation created by the Omicron COVID-19 variant. According to Halifax, house prices rose 1.1% on a month earlier, leaving annual growth at 9.8%, the biggest year-on-year gain since July 2007.
“2022 is likely to see a less heated pace of house price inflation. A fall in mortgage approvals in late 2021 to pre-pandemic levels suggests that the end of the stamp duty holiday in October has prompted a return to more normal levels of housing market activity and demand. The Bank of England’s decision in December to raise Bank Rate will feed through into higher mortgage rates and is likely to be followed by further interest rate increases later this year. Households’ spending power is being squeezed by rising inflation and faces further pressure in the spring from tax rises. And changes in housing preferences driven by the pandemic – ‘the race for space’ – which have pushed up demand for larger, out-of-town properties, will eventually fade.
“However, the ingredients for any serious correction in property values are lacking. Bank of England data showed the average interest on a new mortgage falling to a record low of 1.5% in November. So, any upward move in mortgage costs will take place from an extraordinarily low level. Rising unemployment, what has so often been the reason for house price falls, looks to have been avoided and households, overall, are sitting on substantial unplanned savings accumulated during the pandemic. Moreover, the delay caused by the Omicron variant in returning to pre-COVID-19 normality could prolong support to housing demand and prices from pandemic-driven shifts in preferences. So, while the EY ITEM Club expects house price growth this year to slow from 2021’s double-digit pace, an outright fall in prices is unlikely.”