Hometrack House Price Index Report October 2021

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Signs of a gradual slowdown in the housing market have been creeping into the final months of the year.

Our latest House Price Index (HPI) estimated house price growth slowed from more than 7% in August and September to 6.9% in October. This takes the average residential property valuation to £240,000.

Meanwhile, our HPI shows quarterly house price growth fell from 2.8% in July to 1.2% in October.

Mortgage approvals have also gone into reverse. The Bank of England’s latest count showed offers agreed for purchases fell from 71,851 to 67,199 – closer in line with the pre-pandemic 12-month average.

So are these the early warning signs we’re heading for a subdued market in 2022?

What will the housing market look like in 2022?

There’s little doubt that next year will be quieter. We estimate that by the end of they year 1.5 million transactions will have taken place. That means one in 16 privately-owned homes changed hands this year making it the busiest housing market since 2007.

That’s a tough act to follow. Especially when the flow of new homes being listed for sale is now 21% below the five-year average, underlying stock levels are low, and uncertainty hangs over the economy in the form of rising inflation and interest rates.

But we think there are several positive factors that will help maintain a healthy level of house sale transactions next year which we forecast will reach 1.2 million.

Pandemic effects on the housing market not over

Heightened demand from homebuyers wasn’t just down to the stamp duty holiday, as we can see in the month that followed the end of the tax relief on 30 September.

Our property data shows buyer demand has remained 19% above the five-year average. We believe demand will remain strong next year as the pandemic-effect on buyers’ behaviour has yet to wane.

A shift in the way families think about the spaces they live in, a re-evaluation of priorities to be closer to family and changes in working patterns will continue to maintain buyer momentum.

We expect a shift towards a more normal mix of buyers and slightly less demand from those with nothing to sell such as investors and first-time buyers. Good news for improving stock levels.

That said, ongoing lower levels of supply are expected to continue to underpin pricing next year

Homeowners who bought a property more than five years ago are likely to be awash with equity creating more opportunities for them to move. In the last five years the average home has risen in value by almost £50,000.

Room for price growth in affordable homes market

Another area of opportunity for buyers can be found in some of the UK’s more affordable housing markets where there remains plenty of room for price growth.

It’s not surprising that those parts of the UK which have the lowest price to earnings ratio are the areas that experienced the highest annual house price growth this year, as buyers flocked to those regions.

The latest regional house price growth figures

Countries and regions topping Zoopla’s table of highest annual price growth in October are Wales, 10.8%, North West 9%, East Midlands and the South West both at 8.3%.

Liverpool, Manchester and Sheffield were ranked the top three cities for price growth, recording annual rises of 10.6%, 8.7% and 7.9% respectively.

In some of these regions and cities, buyers can expect to spend less than four times their salary buying a home. Take Liverpool as an example. Our HPI shows the average home in this city is £141,000, around £100,000 less than the price of an average UK home.

Economic trends that will impact the housing market

Rising inflation, however, will affect house prices next year as households watch their cost of living rise.

An increase in interest rates is expected but the arrival of a new Covid-19 variant has cast doubt over when the Bank of England will up the base rate, triggering a rise in mortgage rates.

Although the increase is expected to bw small, it’s likely to impact buyer sentiment particularly among those who have never seen a rate rise before.

Even so, the mortgage market remains highly competitive. Average interest rates for those borrowers who have a deposit of 10% or less fell in November, keeping 95% two-year fixed rates below 3%, according to Bank of England data.

A gradual rise in rates has begun among the lower loan to value (LTV brackets) – average two-year fixes at 75% LTV have increased from 1.3% in September to 1.52% in November. But rates are still low compared to long-run averages. Any small rise in the Bank of England Base Rate is unlikely to change that picture in 2022.

Lack of supply in the housing market

Supply constraints are expected to remain a fixture of the housing market in 2022. As we head towards the end of this year, our research found that the total stock of homes for sale is 41% below the five-year average. Houses are in even shorter supply.

But this year’s shortage of stock certainly did nothing to hold house sale transactions back. If you have committed buyers and committed sellers, stock levels may remain tight but homes are in fact changing hands quickly rather than sitting on the market for months.

Judging from anecdotal evidence from the latest RICS report, buyer demand is strong but the lack of listings has slowed momentum. We expect more new listings in the New Year, boosting the number of homes for sale and a better mix of buyers who are sellers as well.

Looking ahead, 2022 is set to return to more normal transaction levels which we predict will reach 1.2 million by the end of the year. House price rises will reach a modest 3% as the shortage of supply continues to underpin prices.

Samantha Partington 29 November 2021
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