After falling in May and June, house prices shrugged off the collapse in GDP and the decline in employment to surge in the second half of the year. (See Chart 1.) As a result, annual house price growth in Q4 is on track to be just over 6%, the strongest since 2014. But we suspect that house prices will give up most of their 2020 gains in 2021, as the end of the stamp duty holiday weighs on demand and the end of the furlough scheme boosts supply through a modest rise in forced sales. (See here.) That said, the main risk to our forecast now appears to be on the upside from more generous policy support than we currently assume. The furlough scheme has just been extended to April and could be prolonged further. Given we expect GDP to rebound quickly from Q2 2021, that would reduce the rise in unemployment, and in turn the drop in house prices, we expect next year.
- After falling in May and June, house prices shrugged off the collapse in GDP and the decline in employment to surge in the second half of the year. (See Chart 1.) As a result, annual house price growth in Q4 is on track to be just over 6%, the strongest since 2014. But we suspect that house prices will give up most of their 2020 gains in 2021, as the end of the stamp duty holiday weighs on demand and the end of the furlough scheme boosts supply through a modest rise in forced sales. (See here.) That said, the main risk to our forecast now appears to be on the upside from more generous policy support than we currently assume. The furlough scheme has just been extended to April and could be prolonged further. Given we expect GDP to rebound quickly from Q2 2021, that would reduce the rise in unemployment, and in turn the drop in house prices, we expect next year.
- Economic indicators show that the recovery went into reverse during the second lockdown. But we think that the economy will recover quickly as the vaccine is rolled out and COVID-19 restrictions can be eased.
- Market conditions and search activity suggest that buyer demand is starting to plateau, but at a very high level. In contrast, demand for new builds appears soft.
- Mortgage approvals and transactions were substantially above pre-virus levels in October and the ongoing surge in mortgage approvals – to the highest level since 2007 – suggests transactions will increase further in the near term.
- House prices are on track to record their largest increase since 2014 this year. But rental values have suffered from the economic impact of the pandemic, particularly in London, which looks set to drag down the official measure of national rental growth next year.
Chart 1: Nationwide House Price Index
Sources: Refinitiv, Nationwide, Capital Economics
- The economic recovery slowed to a snail’s pace in October with GDP rising by just 0.4% m/m before the second lockdown in England caused a renewed fall in GDP in November, perhaps of 5% m/m (2). High numbers of virus cases probably will mean restrictions remain in place until the spring. But with the vaccine being rolled out, from Q2 next year onwards we think that activity will rebound swiftly (3).
- While GDP was still 8% below its pre-virus level in October, employment has dropped less sharply, down by 1.7% from its pre-virus peak. The employment PMI shows that job losses are slowing (4). But if the furlough scheme ends in April as planned employment will drop further, pushing the unemployment rate up from 4.9% to 7.0%. That’s an important reason why we expect house prices to dip in 2021 (5).
- Inflation fell from 0.7% to 0.3% in November mainly due to a drop in clothes price inflation, but it should rise in 2021 as the impact of the drop in energy prices fades and temporary VAT cuts are reversed. Our central view is that a Brexit deal will be agreed. But if not, a fall in the pound and import tariffs will push inflation up more (6). The Bank of England would not raise interest rates in either scenario. And unlike investors, we think the Bank would use asset purchases and its Term Funding Scheme rather than interest rate cuts to loosen policy if there is a no deal (7).
Chart 2: Capital Economics BICS Indicator & GDP
Chart 3: Quarterly GDP (Q1 2020 = 100)
Chart 4: Employment PMI & Employment
Chart 5: Unemployment & House Prices
Chart 6: CPI Inflation (%)
Chart 7: Bank Rate Expectations
Sources: ONS, Refinitiv, BoE, OBR, Markit, Capital Economics
Housing Market Data and the Home Buying Process
Steps in the process
Unsold property per surveyor (No.)
New properties for sale (% bal)
New buyer interest (% bal)
Site visits (new housing, % bal)
Asking prices (% y/y)
Use of sales incentives (% bal)
Agreed sales prices (% bal)
New homes prices (% bal)
Net reservations of new homes (% bal)
Agreed sales (% bal)
Price expectations – next 3m (% bal)
Sales expectations – next 3m (% bal)
Mortgage approvals (000s)
House prices (% y/y)
Completed sales per surveyor
House prices (% m/m)
UK House Price Index
House prices (% m/m)
House prices (% y/y)
Property transactions (000s)
Source: Capital Economics
- Surveyors reported that buyer and seller activity continued to increase in November but not by as much as in October and they expect that agreed sales will plateau ahead. With asking prices still rising and sales high relative to stock, prices are likely to record further increases in the next few months. In contrast to the wider market, demand for new builds appears weak.
- Mortgage approvals for house purchase rose to their highest level since 2007. Meanwhile transactions, which typically lag approvals by a month or two, hit a four-year high in October and are likely to follow approvals higher.
- In stark contrast to what was predicted when the pandemic hit, the surge in house prices over the past six months has seen growth accelerate to its fastest pace since 2016 on most measures. There is little sign yet that price growth is easing. But the end of the stamp duty holiday and the furlough scheme in March 2021 is likely to lead to some of 2020’s surge in prices being reversed.
- The new buyer enquiries and sales instructions balances of the RICS survey have eased from the record levels seen after the housing market reopened in May. But by remaining above zero they suggest that housing market activity has continued to increase month on month (8). Given our seasonally adjusted measure of searches on Rightmove and Zoopla has plateaued, it seems more likely that buyer demand has stabilised at a high level (9).
- There is some localised weakness, for instance in the midlands there has been a more obvious cooling in buyer interest (10). Demand also appears to have softened for newbuilds, with the Home Builders Federation survey suggesting that site visits and reservations were falling in year-on-year terms in October, before the second national lockdown (11).
- Demand has also been strong despite banks raising the interest rate they charge on, and limiting the availability of, high loan-to-value products (12). Inventory has risen to its highest level for three years according to the RICS, but with demand also very high, properties continue to sell quickly (13).
Chart 8: RICS New Sales Instructions and New Buyer Enquiries (% Balance)
Chart 9: Google Searches for Property Portals & RICS New Buyer Enquiries
Chart 10: New Buyer Enquiries by Region
Chart 11: Housebuilders’ Reported Net Reservations and Site Visits (% Balance)
Chart 12: Mortgage Availability & Quoted Rates
Chart 13: RICS Unsold Stock per Surveyor
Sources: RICS, Google, HBF, Refinitiv, BoE, Moneyfacts
- After recovering to their pre-virus level in September transactions hit a four-year high in October. And the ongoing surge in mortgage approvals suggests transactions will increase further in the months ahead (14). The RICS newly agreed sales balance has eased off though, suggesting that approval numbers will start to cool in the coming months (16).
- That said, we think approvals and transactions will stay at a high level until March. The twelve-month sum of approvals was still 12% below its pre-virus level in October, suggesting there is pent-up demand yet to be expended (15). And first-time buyer demand has proven resilient to the reduction in high LTV lending suggesting that larger deposits have not been insurmountable, perhaps due to more saving by some households during lockdowns (17).
- Nonetheless, surveyors expect sales to plateau at a high level over the next three months before dropping next year (18). Finally, in contrast to the surge in mortgage approvals for house purchase remortgaging activity remains weak, perhaps partly due to banks running into capacity constraints (19).
Chart 14: Mortgage Approvals & Transactions (000s)
Chart 15: RICS Agreed Sales & Mortgage Approvals
Chart 16: Mortgage Approvals for House Purchase (000s)
Chart 17: Mortgage Recipients (% Advances)
Chart 18: RICS Sales Expectations (% Bal.)
Chart 19: Mortgage Approvals (000s)
Sources: Bank of England, HMRC, RICS, Capital Economics
- House price growth has exceeded all expectations in 2020. All the main measures of house prices point to an increase in prices of 6% y/y or more in Q4 (20). There is no sign of a slowdown yet, with both Halifax and Nationwide reporting another solid increase in prices in November (21). With sales very high relative to stock, house prices are likely to make further gains in the next few months (22).
- Unlike house prices, rents have suffered from the economic impact of the pandemic. The ONS’s index of private rents measures the stock of rents, so it takes time to pick up changes in market prices. Zoopla’s timelier index of rents on newly let property shows that rents are staring to fall (23).
- Note, though, that the fall in rents has been much worse in London, where the sudden increase to homeworking has caused demand to collapse (24). Nationally, rental demand has remained more resilient relative to supply (25).
Chart 20: House Prices (% m/m)
Chart 21: House Price Indexes (% y/y)
Chart 22: Ratio of Sales to Stock & House Prices
Chart 23: Rents (% y/y)
Chart 24: Zoopla New Let Prices (% y/y)
Chart 25: RICS Demand/Supply Balance & Rents
Sources: Nationwide, Halifax, RICS, Refinitiv, Rightmove, ONS, Zoopla
Table 1: Alternative Measures of House Prices
Avg. Price £000s
UK House Price Index (sa)
Sources: Rightmove, Nationwide, Halifax, ONS, Acadametrics, Land Registry
Table 2: Mortgage Borrowing and Residential Property Transactions
BoE Net mortgage lending £bn, sa*
BoE Value of new approvals, £bn, sa
– For house purchase, £bn, sa
– For remortgage, £bn, sa
BoE Mortgage approvals, 000s, sa
– For house purchase, 000s
– For remortgage, 000s
– Other, 000s
HMRC Transactions, 000s sa
Sources: Bank of England, HM Revenue and Customs
*% y/y refers to change in level of £bn on previous year
Table 3: Regional Snapshot
House prices, N’wide, %y/y
– Same period a year earlier
Property Sales, Land Registry
Sources: Nationwide, Land Registry
Andrew Wishart, Property Economist, +44 7427 682411, firstname.lastname@example.org