Housing market activity is booming as pent up demand from the first lockdown is expended and buyers rush to take advantage of the stamp duty cut. There are some tentative signs, though, that the surge in house prices over the summer is starting to subside. And with employment likely to fall further, and the stamp duty cut and the furlough scheme set to end early next year, there is a growing possibility that house prices reverse their 2020 gains in 2021.
- Housing market activity is booming as pent up demand from the first lockdown is expended and buyers rush to take advantage of the stamp duty cut. There are some tentative signs, though, that the surge in house prices over the summer is starting to subside. And with employment likely to fall further, and the stamp duty cut and the furlough scheme set to end early next year, there is a growing possibility that house prices reverse their 2020 gains in 2021.
- Economic indicators show that the recovery stalled even before the second lockdown began. We think GDP will fall by 8% in November and remain on a lower trajectory thereafter, which suggests employment will fall much further. That will put downward pressure on house prices in 2021. (See Chart 1.)
- Market conditions and search activity remained strong in September but there were some signs that buyer demand had started to cool, perhaps tempered by rising interest rates on high LTV mortgages.
- Mortgage approvals and transactions have recovered strongly from the first lockdown, with approvals for house purchase reaching their highest level since September 2007. Agreed sales are still rising, so approvals and transactions will remain high for the next few months at least. But there are reports that surveyors and solicitors are struggling to keep up with demand, which may delay completions.
- House price growth reached a four year high in October after house prices surged over the summer. But there is clear evidence in the regional data of a shift in demand away from dense city centres to the suburbs. Rental values in London look particularly vulnerable. At the national level, demand for rental properties has been resilient. But that may yet change as the fall in employment appears so far to have disproportionately affected renters. (See our Update.)
Chart 1: Employment & House Prices (% y/y)
Sources: Refinitiv, Nationwide, Capital Economics
- The economic recovery has slowed with GDP rising by just 2.1% m/m in August, down from 6.6% m/m in July. And our CE Business Impact of Coronavirus Survey Indicator suggests that the recovery stalled completely in September and October, before the second lockdown in England began (2). We expect this lockdown to send the recovery into reverse and shrink the economy by 8.8% m/m in November (3).
- Employment has “only” fallen by 566,000 since February, far less than the drop in GDP implies thanks to the furlough scheme (4). But with the scheme due to end in March we think that employment will fall by a further 1.3 million, putting downward pressure on incomes and house prices (5). Meanwhile the unemployment rate rose from 4.0% in February to 4.8% by September and may reach a peak of 9% at the end of next year.
- The rise in CPI inflation from 0.2% in August to 0.5% in September, in part due to the Eat Out to Help Out discount ending, may mark the start of an upturn in inflation to 2% (6). But we think that it will settle below-target, around 1.5% in 2022. Earlier this month, the Bank of England announced a further £150bn of QE. We expect at least another £100bn more next year and that interest rates will stay at or below 0.10% for the next five years. So the 10-year gilt yield should stay very low (7).
Chart 2: Capital Economics BICS Indicator & GDP
Chart 3: Monthly GDP (February 2020 = 100)
Chart 4: GDP & Employment
Chart 5: House Prices & Employment (% y/y)
Chart 6: CPI Inflation (%)
Chart 7: Bank Rate Forecast & Gilt Yields (%)
Sources: ONS, Refinitiv, 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 (% m/m)
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
- Measures of buyer and seller activity showed some tentative signs of easing in in September while homebuilders reported a sharp fall in buyer interest, with site visits down on a year earlier. The big picture, however, is that demand remained very strong leading to annual growth in asking prices and agreed sales prices rising.
- Mortgage approvals for house purchase rose further above their pre-virus level of around 65,000 a month to 91,500 in September. Meanwhile transactions, which typically lag approvals by a month or two, recovered to their pre-virus level. The recovery in mortgage lending suggests that housing transactions will rise further over the next few months. But reports that strong demand is causing bottlenecks with solicitors and surveyors, and delays to completions, could prevent transactions strengthening as much as mortgage approvals have.
- The surge in house prices over the past five months has taken annual growth to a four-year high. But the surge may now be petering out. Both the Nationwide and Halifax indexes recorded the smallest monthly increase in prices since June in October.
- Housing market activity remains strong, but there are some signs that it is beginning to be tempered by rising interest rates on high LTV mortgages. While it eased from 63.4 in August to 51.5 in September, the RICS new buyer enquiries balance suggested that buyer interest continued to surge (8). More urban regions, such as East Midlands and London, have seen a more muted increase in interest (9).
- New buyer interest appears to have cooled more recently. Google searches for the property portals Rightmove and Zoopla fell in October and November, although they remain higher than before COVID-19 hit (10). Meanwhile housebuilders reported a drop in site visits and reservations to below the levels of a year earlier in September (11).
- One reason demand appears to be cooling is probably the sharp rise in quoted interest rates on higher LTV mortgages, as banks respond to strong demand and mitigate against a possible decline in house prices in 2021 (12). With inventory still limited, however, we doubt there will be a sudden drop in prices in the very near term, even if buyer demand continues to cool (13).
Chart 8: RICS New Sales Instructions and New Buyer Enquiries (% Balance)
Chart 9: New Buyer Enquiries by Region
Chart 10: Google Searches for Property Portals & RICS New Buyer Enquiries
Chart 11: Housebuilders’ Reported Net Reservations and Site Visits (% Balance)
Chart 12: Average Quoted Mortgage Interest Rates (%)
Chart 13: RICS Unsold Stock per Surveyor
Sources: RICS, Google, HBF, Refinitiv, BoE
- Mortgage approvals look set to rise further as pent-up demand is expended and buyers take advantage of the stamp duty cut. The rise in mortgage approvals for house purchase to 91,454 in September took it to its highest level since September 2007 (14). It seems likely that transactions will follow mortgage approvals higher over the next couple of months. But there is a possibility that reported delays with surveyors and solicitors hold completions back.
- The drop in remortgaging may be a sign that banks are struggling to keep up with applications (15). And there is probably still more demand in the pipeline, as mortgage approvals are yet to make up the ground lost in the first lockdown and the RICS agreed sales balance remains very high (16 & 17).
- The high level of sales, approvals, and transactions is likely to abate next year after pent-up demand is expended and the stamp duty cut ends. Indeed, RICS survey respondents expect sales to remain strong for the next three months, but to drop back next year (18). Finally, note that mortgage repayments have almost fully recovered to their pre-virus level, suggesting that the majority of those who took mortgage holidays have been able to resume servicing their debt (19).
Chart 14: Mortgage Approvals & Transactions (000s)
Chart 15: Mortgage Approvals (000s)
Chart 16: Mortgage Approvals for House Purchase (000s)
Chart 17: RICS Agreed Sales & Mortgage Approvals
Chart 18: RICS Sales Expectations (% Bal.)
Chart 19: Regular Repayments of Mortgage Principal (£bn)
Sources: Bank of England, HMRC, RICS, Capital Economics
- The surge in house prices since June appears to have started to slow, with both the Nationwide and Halifax house price indices both recording the smallest monthly increase since June in October (20). Despite the dip in the spring, house prices are up by about 5% in the year to date, and annual house price growth has risen to its highest pace in at least four years (21 & 22).
- Regional house price data for August showed that Wales, the Midlands and the North West have been the strongest performing regions so far this year (23). London saw a more modest rise in house prices, and RICS respondents reported the smallest increase in prices there in September. That probably reflects the increase in working from home, which has shifted housing demand away from dense city centres to the suburbs. (See our Focus.)
- The shift in owner occupier demand away from cities and London in particular is also evident in the rental market (24). But nationally rental demand appears to be strong despite the increase in unemployment so far falling disproportionately on renters (25). (See our Update.)
Chart 20: House Prices (% m/m)
Chart 21: House Price Indexes (Dec. 2019 = 100)
Chart 22: House Prices (% y/y)
Chart 23: YTD Change in House Prices & Surveyors’ Reported House Price
Chart 24: Rental Demand and Lettings Supply (% Bal.)
Chart 25: Rental Demand/Supply Balance and Rents
Sources: Nationwide, Halifax, RICS, Refinitiv, Rightmove, ONS, CE
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