- A 0.8% month-on-month rise in Nationwide’s measure of house prices in January meant house price inflation began 2022 on a similarly strong note to the end of 2021. Annual growth of 11.2% was the strongest start to a year since 2005.
- But the EY ITEM Club doubts January’s performance is a taste of things to come this year. Housing demand in 2022 will not receive the support offered by last year’s stamp duty holiday. And the likelihood that the Monetary Policy Committee (MPC) will raises interest rates several times this year, beginning with a hike in this week’s meeting, means mortgage rates will increase.
- That said, most mortgage holders are insulated from any immediate increase in mortgage rates by the prevalence of fixed-rate mortgages. More stringent mortgage regulation means borrowers are better able to deal with higher rates. And policy makers have shown themselves willing to intervene to support the housing market. So the EY ITEM Club doubts higher borrowing costs will cause any serious correction in house prices.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“Although monthly growth in Nationwide’s measure of house prices slowed to 0.8% in January from December’s 1%, it was still strong by historical standards and left annual growth at 11.2%, up from 10.2%. This was the strongest annual growth for the start of the year since 2005.
“But a robust start to the year for house price growth probably won’t prove a taste of things to come. Notably, the stamp duty holiday, which supported housing demand and prices last year, is now in the past. To the extent the tax holiday brought forward purchases, its after-effects may drag on housing market activity in the near term. Meanwhile, the prospect of a series of interest rate rises by the Bank of England in 2022, starting with an expected hike in this week’s meeting, will translate into higher mortgage rates. And cost of living pressures faced by households from rising inflation and taxes mean fewer people will be able to afford to borrow the necessary amount they need to buy at higher mortgage rates.
“While house price growth will probably cool this year, the EY ITEM Club doesn’t expect any serious correction. The unplanned savings built up by some households during the pandemic will go some way to offsetting the income squeeze. And the growth in popularity of fixed-rate mortgages over the last decade means the majority of existing mortgage holders are protected insulated from increases in mortgage rates in the short term. Meanwhile, the more stringent affordability criteria and mortgage regulation introduced during the 2010s mean recent buyers should be better placed to cope with higher mortgage rates than in the past. And the clear message of housing policy in recent years, such as Help to Buy, the stamp duty holiday and the mortgage guarantee scheme, is that policymakers are willing to do what it takes to avoid a significant fall in house prices.”