Press release

20 Jun 2022

UK house prices set for continued growth despite economic slowdown, says EY ITEM Club

The EY ITEM Club expects house prices to rise 8% over 2022, followed by growth of 1.8% and 1.2% in 2023 and 2024 as the housing market avoids repeat of previous contractions

Related topics Growth
  • The EY ITEM Club house prices to rise 8% over 2022, followed by growth of 1.8% and 1.2% in 2023 and 2024 as the housing market avoids repeat of previous contractions
  • Average home expected to cost £291,000 by 2024 – 26% higher than it would have cost pre-pandemic
  • Demand for houses will be squeezed by stretched affordability and higher interest rates – but restricted housing supply and the unequal effects of the cost of living crisis will keep a floor on prices 

LONDON, MONDAY 20 June 2022 – UK house prices are predicted to rise 8% over the course of 2022, followed by growth of 1.8% and 1.2% in 2023 and 2024, according to a new report on the housing market by the EY ITEM Club. Prices are set to avoid a contraction after two years of strong growth and despite a cost of living squeeze.

The EY ITEM Club forecast would leave the average cost of a home (on the ONS measure) at £283,000 by the end of 2022, £287,000 by the end of 2023 and £291,000 by the end of 2024. This would be 26% higher than the average £231,000 cost of a home in Q1 2020, just before the start of the pandemic.

According to the report, growth in house prices will be slowed down by stretched affordability, rising mortgage rates, and falling household incomes – but limits on supply, low unemployment and the unequal effects of cost of living pressures will stop prices from falling.

Peter Arnold, EY UK Chief Economist, says: “While short-term prospects for the wider economy have become gloomier, the same can’t be said for the housing market. In previous economic cycles, a house price contraction would be on the cards with incomes squeezed and a high chance of a market correction after two years of out-sized growth. Instead, house prices are set for a softer landing. 

“There are certainly a number of signs pointing to slower house price growth though. The ratios of house prices to average incomes, and of average mortgages to incomes, are already at record highs, for example. An increase in the cost of living may also prompt some prospective buyers to become more cautious or to struggle to afford a deposit.

“But the squeeze on demand is being counterbalanced by a continued squeeze on supply and even a significant, sustained expansion in housebuilding would be unlikely to have a material impact on average prices. Meanwhile, rising interest rates are unlikely to affect homeowners in the same way they would have done previously, with the dominance of fixed-rate mortgages meaning rate changes will take some time to filter through to borrowers. Crucially, the economy is also not seeing the high levels of unemployment that have been a key factor in previous house price contractions.”

The report says that it is also important not to overstate the impact of cost of living pressures on the housing market. While almost all households are feeling the pinch of higher bills, the impact is most acute among those on lower incomes who are less likely to be homeowners or potential house buyers. In contrast, those on higher incomes are less exposed to the rising price of essentials and hold the bulk of the £180bn of additional savings UK households accumulated over the course of the pandemic.

The EY ITEM Club’s new house price forecast notes that the ratio of house prices to average incomes is now 8.8:1 – having previously peaked at 8.5:1 in 2007 and 2018 – while the ratio of average mortgages to incomes is 3.4:1, the highest figure since records began in 1992. Average property transactions in 2021 required a deposit of around £100k, with first-time buyers needing to find an average of almost £60k. 

While the EY ITEM Club forecasts that the Bank of England’s Monetary Policy Committee will raise interest rates to 1.5% by the end of 2022 (and to 2.5% by the end of 2024), this is not expected to have a significant immediate impact on mortgage affordability. By 2021, only 20% of mortgages by value had a floating interest rate, down from 70% a decade earlier.

Martin Beck, chief economic advisor to the EY ITEM Club, adds: “Interest rates have become a much smaller risk factor to house prices than unemployment. The rise of fixed-rate mortgages means borrowers are much less sensitive to interest rate changes than previously, while growth in outright ownership and renting mean fewer households have mortgages in the first place. In 2005, 40% of households had a mortgage, but by 2019-20 this share had fallen to 30%. And changes in lending practices over the past decade mean mortgage holders are also better able to deal with higher borrowing costs. All this adds up to homeowners facing less pressure to sell when borrowing costs rise – further tightening housing supply.”

Pandemic helped house prices outpace economy

The EY ITEM Club’s report says that house prices were insulated from the pandemic by a number of factors, including government interventions in the economy, the uneven economic impact of the pandemic, and low interest rates. 

Heading into the pandemic, house price growth was modest and prices were expected to contract alongside the wider economy as a result of COVID-19. Instead, while GDP saw its biggest annual contraction in a century in 2020, house prices grew 2.8% before going on to rise 9.5% in 2021 – the fastest increase in 17 years. House prices also finally matched their pre-financial crisis average in real terms.

Martin Beck comments: “House price resilience in the pandemic was in part down to the significant government interventions seen in 2020, with homeowners benefitting from the furlough scheme and buyers supported by Stamp Duty threshold changes and the Mortgage Guarantee Scheme. Although GDP fell 21.5% in Q2 2020 from its pre-pandemic level, household incomes were down by only 4.1%.”

The report adds that the housing market was further insulated from the wider economy because pandemic-related job losses and reduced incomes mostly affected those unlikely to buy or own houses. Meanwhile, some existing and potential homeowners helped boost market activity as changes in working practices encouraged a ‘race for space’.

Peter Arnold concludes: “Policymakers face a clear housing conundrum: while the impact of shrinking house prices on current homeowners means a soft landing for prices is welcome, persistently elevated prices carry other economic costs. The gap between house prices and incomes means more indebted households, leaving the economy vulnerable to another financial crisis. High housing costs affect productivity by drawing investment and spending away from other parts of the economies, while inequality is exacerbated. And although the expansion of supply is needed, this alone is unlikely to have much of an impact on average prices.”