There are clear signs that the end of the stamp duty holiday is causing the housing market to slow. In January the RICS reported a sharp drop in new buyer enquiries and seller instructions, and house prices edged down for the first time since last summer. But there are tentative signs that buyer demand bounced back in February, even though prospective buyers have little chance of benefitting from the tax break. Google trends data show that searches for property portals are still substantially higher than before the pandemic. Rising unemployment will lead to some forced sales later in the year, and this will drag activity and house price inflation down. But with most high-income households enjoying healthy finances and the structural increase in remote working prompting them to re-evaluate their home, there is a risk that our forecast that house prices will dip by 4% this year is too pessimistic.
- There are clear signs that the end of the stamp duty holiday is causing the housing market to slow. In January the RICS reported a sharp drop in new buyer enquiries and seller instructions, and house prices edged down for the first time since last summer. But there are tentative signs that buyer demand bounced back in February, even though prospective buyers have little chance of benefitting from the tax break. Google trends data show that searches for property portals are still substantially higher than before the pandemic. (See Chart 1.) Rising unemployment will lead to some forced sales later in the year, and this will drag activity and house price inflation down. But with most high-income households enjoying healthy finances and the structural increase in remote working prompting them to re-evaluate their home, there is a risk that our forecast that house prices will dip by 4% this year is too pessimistic.
- Economic indicators suggest that the recovery went into reverse during the latest lockdown, but household savings have surged which should lead to a swift rebound in consumer spending when restrictions ease.
- Market conditions and search activity show that the end of the stamp duty holiday has caused a larger drop in new sales instructions than new buyer enquiries in most regions.
- Mortgage approvals and transactions have started to ease off as the boost from the stamp-duty holiday fades, but surveyors are increasingly confident in the outlook for sales further ahead.
- House prices slipped back in January for the first time since last summer, but leading indicators don’t point to a further decline. Meanwhile, falling rental values in London are pulling down the national average.
Chart 1: Google Searches for Property Portals & RICS New Buyer Enquiries
Sources: RICS, Google, Capital Economics
- The 1.2% m/m rise in GDP in December was enough to prevent output from falling in Q4, despite the lockdown in November. But the new lockdown means economic activity probably fell in January 2021. (See Chart 2.) On the upside, we think the rollout of vaccines will allow GDP to rebound sharply from Q3, and return to its pre-crisis peak by Q1 2022. (See Chart 3.)
- Renewed restrictions suggest that the household saving will accelerate again. (See Chart 4.) Meanwhile, the drop in employment since the pandemic began remained at 1.7% in November. But the furlough scheme was still supporting 14% of employees in December. (See Chart 5.) We expect peak-to-trough drop in employment to reach 3% when the scheme ends, and the unemployment rate to rise to 6.5%.
- Rising airfares and fuel prices lifted CPI inflation from 0.3% in November to 0.6% in December. We expect it to peak close to 2.5% in early 2022 as the hospitality sector VAT cut is reversed and the drag from low energy prices fades. (See Chart 6.) Following the February MPC meeting, investors have come round to our view that the BoE won’t use negative interest rates. But they also think Bank Rate will rise in three years, whereas we think that it will be five years before that happens. (See Chart 7.)
Chart 2: Capital Economics BICS Indicator & GDP
Chart 3: Monthly Real GDP (Feb 2020 = 100)
Chart 4: Household Savings & Cash Holdings
Chart 5: No. of People on Furlough Scheme (Millions)
Chart 6: CPI Inflation (%)
Chart 7: Bank Rate Expectations (%)
Sources: ONS, Refinitiv, BoE, Gov.uk, 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 (% y/y)
UK House Price Index
House prices (% m/m)
House prices (% y/y)
Property transactions (000s)
Source: Capital Economics
- While mortgage approvals and transactions remained high in December, there are clear signs that the end of the stamp duty holiday is causing the housing market to slow. Mortgage approvals edged lower in December, the first decline since May.
- The newly agreed sales balance fell into negative territory in January, suggesting that a further reduction in approvals and a drop back in transactions is likely in the months ahead. Meanwhile, both Halifax and Nationwide reported a small decrease in prices on the month in January, reflecting the diminishing chance of buyers at the mortgage approval stage of the home buying process completing before the stamp duty holiday ends.
- That said, there are some tentative signs that house prices might fare better than we anticipated as the tax break ends. While new buyer enquiries slumped in January, new sales instructions fell more sharply, so limited stock should support prices. Indeed, inflation in asking prices stabilised in February. And search data from Google show buyer interest rising in February, remaining well above pre-COVID-19 levels.
- The sharp drop in new sellers and buyers in January suggests that the latest lockdown and the looming end of the stamp duty holiday have caused the housing market to enter another lull (8). But the fall in supply makes the impact this will have on prices more uncertain. Stock remains limited, suggesting there hasn’t been a big deterioration in the balance of demand and supply in the market (9).
- Only in a handful of regions has the drop in new buyer enquiries exceeded that in new sales instructions, most notably London. (10). Meanwhile, the virus is still limiting the number of visits prospective buyers make to new build sites. But that hasn’t impeded sales, with net reservations in line with pre-pandemic levels (11).
- The availability of high LTV mortgages remains low, and the interest rates on those that are available are high (12). But we think that increased saving has allowed first-time buyers to upsize their deposits to offset this drag. (See here.) Looking ahead, Google searches for property portals rose in February, suggesting buyer demand may be less affected by the end of the stamp duty holiday than we anticipated (13).
Chart 8: RICS New Sales Instructions and New Buyer Enquiries (% Balance)
Chart 9: RICS Unsold Stock per Surveyor
Chart 10: Buyer Enquiries & Seller Instructions by Region
Chart 11: Housebuilders’ Reported Net Reservations and Site Visits (% Balance)
Chart 12: Mortgage Availability & Quoted Rates
Chart 13: Google Searches for Property Portals & RICS Newly Agreed Sales
Sources: RICS, CE, HBF, Refinitiv, BoE, Moneyfacts, Google
- The surge in sales since the housing market reopened has completely made up for the drop in activity during the first lockdown. As a result, mortgage approvals for house purchase were higher in 2020 than in 2019 (14). The slight fall in mortgage approvals in December suggests that activity is now staring to cool, although transactions are likely to remain very high until the stamp duty holiday ends in March (15).
- The newly agreed sales balance of the RICS survey suggests that mortgage approvals will continue to drop back, with buyers at that stage in January highly unlikely to benefit from the stamp duty holiday given delays in conveyancing (16). However, as buyer demand appears to have been resilient to the end of the tax relief, surveyors’ expectations for sales further down the line have improved (17).
- While transactions have been very strong recently, sales of flats appear to have been impeded by the cladding scandal (18). Finally, while mortgage repayments are marginally below their pre-COVID level, other households have made use of reduced expenditure to pay down their mortgage (19).
Chart 14: Mortgage Approvals (NSA, 000s)
Chart 15: Mortgage Approvals & Transactions (000s per Month)
Chart 16: RICS Agreed Sales & Mortgage Approvals
Chart 17: RICS Sales Expectations (Balance, %)
Chart 18: % of Transactions Accounted for By Flats
Chart 19: Mortgage Repayments (£bn)
Sources: Bank of England, HMRC, RICS, Capital Economics
- Both the Nationwide and Halifax house price indices dropped by 0.3% m/m in January, the first decline since the summer (20). Nonetheless annual house price growth was still high on both measures, at around 6%. Inflation in Rightmove’s measure of asking prices decreased from 6.6% in December to 3.0% in February, suggesting house price growth will moderate in the coming months (21).
- That said, leading indicators of house price growth don’t currently suggest that the end of the stamp duty holiday will cause house prices to drop back. While buyer demand has weakened, so have new sales instructions. As a result, the ratio of sales to stock is consistent with further increases in house prices (22).
- The 1.2% y/y drop in Zoopla’s national measure of rents on new lets suggests that annual growth in the ONS’s index of all rent prices will fall back to zero later this year (23). The drop was due to the sharp fall in rents in London (24). Elsewhere rental growth has held steady. Lettings agents expect that pattern to continue over the next three months (25).
Chart 20: House Prices
Chart 21: House Price Indices (% 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 Rent Expectations
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