Home sweet home
The housing market has certainly kept forecasters busy over the last 18 months. Since the restrictions on housing market activity were lifted after the first lockdown, the level of transactions and house price growth has been remarkable. It’s probably fair to say only an oracle would have predicted this at the start of the pandemic. Even as we recalibrated to the resilience of the market, its continued strength following the various ends of Stamp Duty holidays has surprised most.
Over last year transaction volumes have hit 1.5million, the highest since the financial crisis and house prices have grown 10%. The most recent data points to continued momentum, albeit at more modest levels than we have seen. Nationwide and Halifax both reported continued strong monthly gains in house prices in September and October and while mortgage approvals have fallen back, they remain above pre-Covid levels.
House prices have grown
Q3 2021 REGIONAL HOUSE PRICES/GROWTH
Despite the undoubted contribution the Stamp Duty holiday has had to boosting activity, the impact of the reassessment of housing choices following the pandemic live/work experience is increasingly apparent. House price growth in many other advanced economies which have not had a tax incentive to transact has also been very strong since the pandemic, pointing to impact this is having in society.
HOUSE PRICE GROWTH IN KEY MARKETS
While the >1.5 million transactions of 2021 is very high, it still only means about 5% of our housing stock has changed hands. There is plenty of scope for additional households to take a view as longer-term work arrangements become clearer and would-be movers who held off making a decision potenially gain confidence. This is one of the key reasons we expect transaction volumes and price growth to be ahead of pre-pandemic levels next year.
Along with this, we think there are other major factors which will help continue to propel the housing market in 2022. The labour market continues to be robust and we expect inflation to peak in the first half of next year, with pressures that are driving it receding as the year progresses. This will support the economy, underpin consumer confidence and create a willingness to undertake house purchases. And, crucially, while there are some downside risks, our inflation outlook means we don’t believe interest rates are likely to rise above 0.5% by the end of 2022.
This expectation is below the Bank of England’s current guidance (1% by the end of 2022) but were their scenario to play out, the market is still well placed to absorb it without significant disturbance. The monthly affordability of mortgage payments remains good by historic standards and mortgage rates would have to rise significantly to have enough of impact to derail house price growth.
The monthly affordability of mortgage payments (even with anticipated interest rises) is important to keep in mind when considering the ever-popular press coverage we see around high house prices relative to incomes being unsustainable. It is worth noting that the recent growth we have seen has now taken the median house price to income ratio to 7.6 which is above the pre-Global Financial Crisis high. However, the monthly affordability of mortgage repayments remains well below the levels that have preceded previous price corrections.
High house prices relative to incomes can present an obstacle for those looking to buy their first home or upsize but an alleviating factor is that the household savings build up during the pandemic has not been spent down. We expect people to continue to use savings to support larger deposits for house purchases, particularly as they are likely to be spending more time at home and therefore willing to spend more on their housing.
It is worth pointing out that it has disproportionately been more affluent households who have accrued savings, and therefore we are likely to see proportionately more activity from higher income groups. This has been one of the stories over the last year and, while activity from all types of purchaser has increased, first time buyer activity has increased less than that of home movers or cash buyers. This will help support demand for rental property as would-be first time buyers remain in the sector longer to raise enough money for deposits.
Upward pressure on prices from people being able to stretch mortgage lending is greatest in the regions where the house price to income ratio is lowest. These are the regions that have seen the strongest growth this year (Wales and the North) and we expect this trend to continue next year. Conversely, in London, where house prices to income ratio is very high, this will act as a constraint on price growth despite some partial offsetting from wages rising.
This has been particularly pronounced in this cycle and because house prices relative to incomes are now so high in London, this will act as constraint on growth in the capital next year. Although wage growth will go some way to alleviating this. Overall, we expect London to underperform relative to other regions, as it has this year, although it will experience some benefit from a return in appetite as people rediscover the agglomeration of benefits of the city.
AFFORDABILITY AND POSITION IN HOUSING MARKET CYCLE
The top end of London’s market which has a distinct set of drivers will likely also outperform the wider London market, as it currently looks relatively good value compared to global competitors and historic levels. There should also be a boost as international buyer demand returns with travel restrictions easing.
Return of the renter
As with house prices, rental growth has been very strong in 2021. Zoopla’s index shows that rental growth outside London is at its highest level since before the GFC. London had been the exception to the growth story but all indicators are now suggesting a strong recovery in the capital and notably the RICS residential survey points to expectations of strong rental growth across all regions.
The strong rental market will help underpin confidence in the Build to Rent sector which has had a strong year in terms of investment volumes, despite the pandemic uncertainty and concerns about city centre living. There have also been a number of high profile new entrants to the sector with ambitious targets, including John Lewis and Lloyds. Along with the existing capital chasing the sector, this will mean opportunities are closely contested and we expect to see yield compression in London and prime regional locations.