2021 likely to see house price surge reversed - Capital Economics
UK Housing

2021 likely to see house price surge reversed

UK Housing Market Update
Written by Andrew Wishart

The government’s plan to end the furlough scheme and the stamp duty holiday in the spring sets the housing market up for a hangover from the surge in prices in 2020. As a result, we are more downbeat on the prospects for house prices in 2021 than most other forecasters. But so long as vaccines prove successful in ending the pandemic, a swift economic recovery should prevent a house price crash.

  • The government’s plan to end the furlough scheme and the stamp duty holiday in the spring sets the housing market up for a hangover from the surge in prices in 2020. As a result, we are more downbeat on the prospects for house prices in 2021 than most other forecasters. But so long as vaccines prove successful in ending the pandemic, a swift economic recovery should prevent a house price crash.
  • Ironically, given Brexit uncertainty was widely cited as a reason for lacklustre transaction volumes in recent years, home sales surged in Q4 2020 when uncertainty about the outcome of the negotiations seemed highest. At least by confirming that tariffs and quotas will be avoided, the Brexit trade deal has prevented us from needing to downgrade our employment and house price forecasts further.
  • But even absent the additional hit of a “no deal” Brexit, we expect the withdrawal of policy support this year, at the same time as unemployment is rising, to cause house prices to reverse some of 2020’s 6.5% increase. The housing market will remain open in the new lockdown. The furlough scheme, mortgage payment holidays, and the ban on possessions will shield it from another drop in economic activity, while the stamp duty cut continues to boost demand. But all this support is due to be withdrawn in Q2.
  • The unemployment rate had already risen from 3.9% to 4.9% by October last year, and 15% of employees were on furlough in November suggesting there will be further job losses when the scheme ends. Given their large capital buffers and the prospect of a swift recovery, banks are likely to be much more reticent to possess homes than during the financial crisis. But the rise in unemployment and a backlog of supressed possessions will lead to a modest rise in forced sales in the summer.
  • That increase in forced sales is likely to come at the same time as buyer demand slumps after the end of the stamp duty holiday. (See Chart 1 & here.) We think the drop in demand and the rise in forced sales will lead to a 4% y/y drop in prices in Q4 2021. (See Chart 2.)
  • Fortunately, a swift economic recovery should prevent the drop in prices we expect from turning into a severe and lengthy correction. (See here.) With interest rates set to remain near zero and employment recovering from Q3 onwards, the recovery will limit households’ financial distress and the slump in buyer demand. We think house prices will start to rise again in 2022.
  • But uncertainty remains high. The main downside risk is that the vaccines fail to end the pandemic, in which case a reorganisation of the economy could be required leading to higher structural unemployment. Another is that banks are not as reticent to possess homes as we hope, leading to a higher number of forced sales. On the other hand, policy could spring a big upside surprise. An extension of the furlough scheme past April and the stamp duty holiday beyond March might prevent a fall in house prices altogether.
  • Overall, we suspect that house prices will slip back by 4% y/y in Q4 2021 whereas the consensus forecast is a smaller 2% drop. If we are right, that would reverse much of the 2020 surge in prices. But a swift economic recovery should prevent it evolving into a prolonged and severe correction.

Chart 1: Housing Transactions per Month (000s)

Chart 2: Nationwide House Prices

Sources: BoE, Capital Economics

Sources: Nationwide, Capital Economics


Andrew Wishart, Property Economist, +44 (0)7427 682 411, andrew.wishart@capitaleconomics.com