2021 price rises could unwind next year - but no major correction

One of the leading housing market analysts says some of the extreme house price rises seen this year could unwind during 2022 - but he sees nothing on the horizon to suggest a major price correction.

Lucian Cook, head of residential research at Savills, has revised his company’s forecast for the mainstream housing market in the light of the price rises following the main part of the stamp duty holiday.

He says: “Some of the growth generated by the extraordinary market conditions of 2020 and 2021 could unwind at times during 2022, but we see nothing on the horizon that would trigger a major house price correction.”

Savills’ revised forecast says average UK house price growth will be 9.0 per cent across the whole of 2021, based on the incredibly strong first half. Savills’ forecasts issued before the stamp duty holiday extension anticipated more modest 4.0 per cent growth for 2021.  

After a strong start to the year, and over 200,000 transactions in June alone, transaction volumes are projected to total 1.62 million this, more than a third (35 per cent) higher than the yearly average over the five years pre-pandemic. 

The agency says that in the period 2022 to 2025 prices are expected to rise by between 11 and 12 per cent, taking total growth to the end of 2025 to 21.5 per cent, on a par with previous forecasts.  However, London’s growth will be more limited - just 12.4 per cent for the five year total.

But, Savills says, the shape of growth over the next four years is more difficult to forecast precisely given the extraordinary conditions of the past 18 months. 

Cook continues: “New buyer demand continues to outweigh supply despite the potential stamp duty saving falling from £15,000 at June 30 to just £2,500 until the end of September, and this against low levels of supply.

“This imbalance looks set to continue,  underpinning further price growth over the near term, particularly as people look to lock into current low interest rates.  But such strong growth in 2021 will leave less capacity for growth over the next few years, particularly as interest rates are expected to rise a little earlier than leading commentators had previously projected.

“The rate at which interest rates rise will also shape price growth. A steeper than anticipated jump in rates would restrict growth, although it would have to be severe to lead to actual falls in values – an outside risk in our view.”

Interest rate rises are critical to the forecasts, Savills says.  

The forecasts assume a Bank of England base rate no higher than 0.5 per cent by the end of 2025.

A number of other key factors point to what Cook describes as a ‘soft landing’ for the market, rather than any dramatic correction in values. 

Since the market reopened last year, price growth has been driven in large part by more affluent buyers, less reliant on mortgage debt and able to lock into low fixed interest rates.  More generally, the pace of economic recovery has helped reduce unemployment levels, stress testing of lending is now embedded in the system, while interest rate rises are still expected to be slow and modest by the end of 2025, meaning a gradual squeeze on affordability.

These factors underpin Savills five year forecasts, but they also indicate limited capacity for further price growth at the end of this period, without substantially affecting who is able to buy and the number of potential transactions.  

First time buyers are likely to be increasingly reliant on government schemes and, where available, on the generosity of their parents.