Forecasting is never straightforward, particularly at turbulent times such as these. Despite the backdrop of Covid and the ending of the stamp duty holiday, the housing market defied all expectations in 2021. This year, however, we have faced new challenges. Spiralling inflation is causing a cost of living crunch, and ushering in an era of rising interest rates. These are conditions that households have not experienced in more than a decade.
Many leading economists failed to predict that inflation would soar, and this highlights the jeopardy inherent in the making of housing market forecasts at the present time. There are several possible outcomes. But in almost every scenario, the risks are probably to the downside.
In the autumn of 2021, we forecast that house price growth would cool this year. This has proven to be the case, but the market has been more buoyant than expected. We think that the average house price in the fourth quarter will be 5.0% higher than in the same period in 2021. We also think that there will be a total of 1.25m transactions this year – a little above the pre-Covid average.
What happens to interest rates is key to the market’s direction in 2023 and beyond. We think the base rate is likely to peak at around 2.5% in early 2023, before falling back slightly towards the end of the year. Given the pressure on household incomes from double-digit inflation, we believe that there will be little capacity for price growth in 2023. We forecast that prices will remain flat.
But, if rates rise more rapidly, there is a stronger likelihood that prices will fall – and that transactions could also slide as households sit tight. Mortgaged households are set to be the hardest hit, which is why we think prime markets are likely to outperform. Rents are forecast to grow by 5% in 2023, reflecting the higher mortgage and other costs faced by landlords.
However, 2024 seems set to be a year of recovery. The economy should be growing again, with inflation settling at a level closer to the Bank of England’s 2.0% target, which would be welcome news for households after two years of squeezed incomes. By the end of 2024, interest rates may find a ‘new normal’ – possibly at around today’s levels which would still be higher than those who bought a home in recent years have been accustomed to.
A general election may be called in late 2024. But, we think prices will rise 2.0% by the fourth quarter of the year, thanks to a degree of pent-up demand that will have started to form in 2023. London will lead this revival, marking the end of the narrowing of the price gap between the capital and other regions.
A new housing market cycle is set to begin in 2025. We forecast that the average house price will increase by 3%, but that London could rise by 5%. Transactions should bounce back to 1.3m, surpassing the pre-Covid average. Overall, we think Prime Central London will see the strongest price growth (15.5%) of any region over the next four years.
