There were signs that buyer demand would hold up well this year even before the government announced the extension to the stamp duty holiday in the Budget. Since then, Google searches for property portals have surged to a six-year high. A further strengthening in buyer demand when sales were already very high, and supply limited, suggests that house price inflation could accelerate further in the near-term.
- There were signs that buyer demand would hold up well this year even before the government announced the extension to the stamp duty holiday in the Budget. Since then, Google searches for property portals have surged to a six-year high. A further strengthening in buyer demand when sales were already very high, and supply limited, suggests that house price inflation could accelerate further in the near-term. (See Chart 1.) What’s more, with the virus data looking very promising and the furlough scheme extended to September, the risk of a big rise in unemployment has diminished. Combined with the housing specific measures in the Budget, that led us to revise up our forecast for house price inflation this year from -4% to +3%. If anything, the strength of the latest data suggests the risks to our new forecast are to the upside.
- Economic indicators suggest that we are on track for a rapid consumer-led recovery when restrictions are eased in line with the government’s “road map”.
- Market conditions and search activity show strong demand and high sales volumes but limited supply.
- Mortgage approvals and transactions declined a little at the start of the year but given strong buyer demand and the backlog in conveyancing, that won’t mark the start of a trend.
- House prices look set to rise further given strong demand relative to supply and further policy support. Meanwhile, rental values might not have much further to fall in London as demand in the capital has started to recover.
Chart 1: Ratio of Sales to Stock & House Price Inflation
Sources: RICS, Nationwide, Capital Economics
- A ramp up in COVID-19 testing as schools reopened has caused case numbers to stabilise, but the test positivity rate continues to fall suggesting that the government will be able to ease restrictions as planned (2). As a result, the dip in GDP in January to 9% below its pre-virus level should mark the low point before the activity recovers quickly (3). We think that the economy will return to its pre-virus size early next year.
- The extension of the furlough scheme to the end of September should allow GDP to recover enough to prevent further falls in employment (4). So most job losses may already be behind us. We have reduced our forecast for the peak in the unemployment rate from 6.5% to 6.0%. Meanwhile government support to incomes and lower spending continue to boost household savings (5).
- Inflation is likely to breach the BoE’s 2% target later this year as energy prices turn from a drag into a boost (6). But core price pressures are likely to take much longer to surface, so we doubt that the MPC will raise Bank Rate before 2023, which is the current consensus among investors (7).
Chart 2: GDP
Chart 3: Virus Cases & Test Positivity Rate (7-Day Ave.)
Chart 4: GDP & Employment
Chart 5: Households Cash holdings (M4 Ex., £bn m/m)
Chart 6: Contributions to CPI Inflation (ppts)
Chart 7: Bank Rate (%)
Sources: ONS, Refinitiv, Gov.uk, BoE, 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 for Purchase (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
- The small decline in transactions and mortgage approvals in January won’t be the start of a downward trend. Indeed, the number of sales per surveyor recovered to 19.1 in February, matching the five-year high reached in November last year.
- Admittedly, the RICS new buyer enquiries balance remained in negative territory in February. But the extension to the stamp duty holiday announced in the Budget has since pushed Google searches for the property portals Zoopla and Rightmove to their highest level since 2015.
- High sales and strong demand but limited stock mean further gains in house prices are likely in the coming months. We wouldn’t put too much weight on the decline in Rightmove asking price inflation because it was driven by the base effect of a strong January in 2020, rather than a loss of house price momentum this year. Indeed, the RICS agreed prices balance remains very high.
- New buyer demand shows no sign of weakening with web searches for homes for sale rising to their highest level since 2015 in the first two weeks of March, no doubt bolstered by the extension to the stamp duty holiday announced in the Budget (8).
- While sales volumes have surged stock has not, leading to a tighter market (9). Rightmove reports that the number of enquiries received per property was the highest ever at the start of March. The stronger rebound in RICS buyer enquiries than in seller instructions in February suggests that this isn’t going to change soon (10).
- Housebuilders have benefitted from high demand and limited second-hand stock. Net reservations were up year-on-year in January despite site visits being depressed by the lockdown (11). At the current pace of sales, most regions only have about six months of stock, below the post-financial crisis average of ten (12). London is a notable exception and will also benefit least from the stamp duty taper (13).
Chart 8: Google Searches for Property Portals & RICS Newly Agreed Sales
Chart 9: RICS Sales & Stock Per Surveyor
Chart 10: RICS New Buyer Demand & Seller Instructions (% Balances)
Chart 11: New Build Site Visits & Reservations (% Balances)
Chart 12: Months of Unsold Stock
Chart 13: Stamp Duty Cost (£)
Sources: Google, RICS, HBF, Gov.uk, Capital Economics
- Mortgage approvals and transactions slipped back in January, but remained well above pre-COVID-19 levels (14). And even before the Budget announcements, surveyors revised up their assumptions for home sales. A majority expect them to rise further in the next three months (15).
- While mortgage approvals are up 46% y/y over the past six months transactions have lagged behind so there may already be a backlog of around 100,000 purchases in the conveyancing process (16). As a result, buyers coming to the market now will have difficulty completing in time to meet the stamp duty holiday deadline, even after the extension.
- High LTV mortgage availability remains limited and mortgage rates on the products that are available are high (17). The mortgage guarantee scheme is likely to have some success in improving availability, as did the previous incarnation of the scheme in 2013 (18). But mortgage rates on high LTV loans are unlikely to drop sharply. In any case, first time buyer demand has been resilient to the squeeze on high LTV lending, although the larger boost to sales volumes has come from home movers (19).
Chart 14: Mortgage Approvals & Transactions (000s per Month)
Chart 15: RICS Sales Expectations (Balance, %)
Chart 16: Mortgage Approvals & Transactions (Feb. 2020 = 100)
Chart 17: High LTV Mortgage Interest Rates & Availability
Chart 18: New Mortgages per Quarter
Chart 19: Gross Advances for House Purchase (£bn)
Sources: Refinitiv, RICS, Moneyfacts, Bank of England, FCA, HMT, CE
- The Nationwide and Halifax house price indices suggest that house price inflation has stabilised at a high level at the start of the year (20). Annual growth in Rightmove asking prices has cooled, but that was due to a base effect of a large rise in prices in January 2020 (21). Asking prices rose on the month in both February and March this year.
- High sales volumes relative to stock levels suggests that house price inflation could accelerate further in the coming months (22). Indeed, most surveyors now expect prices to be higher than they are now in three months’ time (23).
- Inflation in the ONS private rents index ticked up from 1.2% to 1.3% in January. But the drop in Zoopla’s measure of rents on new lets suggests that it will fall back to zero later this year (24). That said, the RICS survey shows rental demand strengthening. And notably, demand in London has started to recover after steep falls in 2020 (25).
Chart 20: House Price Indices
Chart 21: House Prices (% y/y)
Chart 22: Ratio of Sales to Stock & House Prices
Chart 23: RICS House Price Expectations (% Balance)
Chart 24: Zoopla New Let Prices (% y/y)
Chart 25: RICS Rent Expectations
Sources: Refinitiv, ONS, Rightmove, Nationwide, Halifax, RICS, 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 (0)7427 682411, firstname.lastname@example.org