The property market’s stellar start to 2022 would, in any other circumstances, point towards a year of record transactions and double-digit price growth in every region.
But the headwinds facing the market, including the war in Ukraine, suggest that performance is set to be solid rather than spectacular, with sales likely to be lower than in 2021. This was a bumper year with activity driven by the pent-up demand for relocation created by the pandemic.
In the months ahead, the consequences of the tragedy unfolding in the Ukraine are forecast to fuel the inflationary pressures that have already arisen from the unwinding of global lockdowns and the rebound in consumer demand. The surging cost of living, with inflation expected to reach 8% by April, will put a squeeze on household budgets.
Nevertheless, the performance of the market in the first few months of the year underlines people’s desire to spend on housing. Homes sold faster in March than in any March since 2010 when our records began.
Also - again for the first time since at least 2010 - the average seller of a home received 1% more than its initial asking price. The number of sellers who increased their asking prices was six times larger than those who made a downward adjustment.
Fewer homes are likely to change hands this year than in 2021. But the strength of the current market still means more homes may be sold than in any recent pre-pandemic year. The total seems set to exceed the typical number in a year following the end of a stamp duty holiday or other stamp duty concession.
Last September we forecast that transactions would reach 1.25 million this year. We still stand by this forecast.
To date, house prices have withstood the impact of Covid and two small Bank of England base rate rises taking the rate to 0.75%. However, many mortgage rates have gone up, particularly those deals for borrowers with larger deposits.
Fewer homes are likely to change hands this year than in 2021. But the strength of the current market still means more homes may be sold than in any recent pre-pandemic year. The total seems set to exceed the typical number in a year following the end of a stamp duty holiday or other stamp duty concession.
Last September we forecast that transactions would reach 1.25 million this year. We still stand by this forecast.
To date, house prices have withstood the impact of Covid and two small Bank of England base rate rises taking the rate to 0.75%. However, many mortgage rates have gone up, particularly those deals for borrowers with larger deposits.
On paper, higher inflation should speed up the pace of base rate rises. However, the unprecedented circumstances behind inflation’s upward move may give the Bank’s rate-setting Monetary Policy Committee (MPC) pause for thought. By international standards, the UK’s economy and labour market have recovered relatively robustly from Covid restrictions. Yet the members of the MPC will still be wary of stopping the recovery in its tracks.
Underpinning the market’s strength has been a lack of homes for sale – which had begun to be the case even before the onset of the pandemic caused a decline in the amount of stock on estate agents’ books.
Market appraisal levels have picked up in recent months. But the number of homes coming onto the market remains around 10% below last year’s level. It is also almost 40% below the pre-pandemic average. Low stock levels should support prices, even if the cost of borrowing is higher. It is also possible that some buyers may view property as a hedge against inflation.
The threat of Covid may be diminishing. But the cocktail of inflation, rate rises and the situation in Ukraine seem set to suppress activity this year. As a result, we are forecasting price growth to slow, falling below its current record level.
This means we expect the market to be stronger in the first half of the year than in the second, with more homes changing hands during the first six months than in the second. Higher inflation and interest rates will cut the disposable income of some buyers, putting downwards pressure on price growth.
But, as the unexpected leap in prices during the pandemic illustrates, the property market always has the potential to surprise.
THE MPC DECISION
In March the Monetary Policy Committee (MPC) voted to raise the Bank of England base rate by 0.25%, from 0.5% to 0.75%. Eight of the nine-person committee voted for the rise, with one member voting for rates to remain unchanged. This means that the base rate is now at its highest level since March 2020, when Covid lockdowns began.
The MPC committee suggested that it was likely that further ‘modest’ rate rises would be required in the ‘coming months’. However, they acknowledge that there are growing risks to the economy stemming from the Russian invasion of Ukraine and the subsequent disruption to global supply chains which may mean rates will rise more slowly than they perhaps otherwise would have.
In general, a rise in the base rate will ultimately mean higher mortgage rates for those on tracker mortgages or looking to re-mortgage. The MPC noted that rates on lower loan-to-value (LTV) products have risen since the last base rate increase and they expect the most recent rise to once again feed through into higher mortgage rates.
The exception however, will be on higher LTV mortgages (75% and above) where so far rates haven’t come down as much as other products and where lenders are recalibrating their attitudes to risk post- Covid. In the short term, this recalibration is likely to offset a small rise in the base rate.
