A quick economic recovery, sustained fiscal support, and the housing-specific measures in the Budget mean it is likely that policymakers will successfully mitigate the adverse impact of the pandemic on the housing market. As a result, we now think that house prices will avoid a fall, and instead rise by 3% y/y in 2021 and 2.5% y/y in 2022.
- A quick economic recovery, sustained fiscal support, and the housing-specific measures in the Budget mean it is likely that policymakers will successfully mitigate the adverse impact of the pandemic on the housing market. As a result, we now think that house prices will avoid a fall, and instead rise by 3% y/y in 2021 and 2.5% y/y in 2022.
- We previously thought that a spike in unemployment leading to a rise in forced sales at the same time as transactions volumes were low after the stamp duty holiday ended would cause house prices to dip this year. But this threat has now diminished for several reasons.
- First, the extension of the stamp duty holiday is likely to mean that transactions volumes remain very high in Q2 and are still above pre-pandemic levels in Q3 when the less generous “taper” period applies. (See Chart 1.) The 0% Stamp Duty threshold will remain at £500,000 until June (previously March) providing savings of up to £15,000. It will then drop to £250,000 until September, meaning a lesser saving of £2,500, before returning to £125,000 in October.
- We had thought that there would be a spike in transactions at the end of the stamp duty holiday, with a late surge followed by a sharp decline. But it appears that capacity in conveyancing is now lower in the past, and demand has been less responsive to the tax change than previously. As a result, a longer period of strong transactions volumes is likely, with a less pronounced spike.
- Moreover, there are reasons to think that when the stamp duty holiday does eventually end, the slump in home sales will not be as severe as we first anticipated. There has been a similar increase in activity in housing markets in other economies where taxes were not cut. And there were some early signs that demand would have held up well in the UK even if the stamp duty cut had elapsed as planned. (See here.) So other factors also appear to be supporting activity.
- Indeed, the outperformance of prices of larger homes points to a “race for space” as households adjust to remote working. And lockdown savings appear to have been invested into the housing market. First-time buyers have overcome the increase in deposit requirements by upsizing their deposits. (See here.) High saving during the current lockdown means that this effect is likely to continue to support demand.
- The reincarnation of the “Help to Buy: Mortgage Guarantee” scheme could provide an additional prop to demand if it is successful in incentivising banks to return to high LTV lending. Precedent suggests that it will have some impact, albeit a modest one compared to the Help to Buy equity loan. (See here.)
- The upshot is that transaction volumes will be much higher this year than we previously forecast, and the slump when the stamp duty holiday ends will be less severe. Historically, growth in transaction volumes has a close relationship with house price growth. (See Chart 2.) While swings in transactions due to the market shutdown in Q2 2020 have caused the relationship to weaken, a higher transaction volumes profile means house prices are more likely to hold onto their 2020 gains than we previously thought.
Chart 1: Transactions Per Month (000s)
Chart 2: Transactions & House Prices
Sources: Refinitiv, Capital Economics
Source: Refinitiv, Capital Economics
- Meanwhile, the risks to the housing market from higher unemployment, both indirectly through its effect on sentiment and directly by causing distressed selling has reduced. Excellent progress in vaccination and government support to household incomes means that we expect a quick economic recovery when restrictions are eased.
- Our forecast for employment has always been based on the relationship between GDP and jobs reverting to its pre-virus norm when the furlough scheme ends. The extension of the scheme until September, by which time we expect GDP will be much higher than in April (when we had assumed that the scheme would finish), should therefore mean the rise in unemployment is smaller.
- Indeed, we now think that most of the drop in employment is already behind us, and that the unemployment rate will peak at 6% at the end of this year. (See here.) When we made our previous forecast that house prices would dip this year, we expected the unemployment rate to reach 7%. (See Chart 3.)
- Note that our analysis of those who are still on furlough suggests that the drop in employment that results from the end of the scheme may be more consequential for mortgage arrears than job losses to date, which have been focussed on renters. (See here.) Nevertheless, we no longer expect the scale of mortgage arrears and repossessions to be large enough to force down house prices.
- Pulling this altogether, while we still expect house prices to cool over the course of this year, we no longer expect them to decline. Annual house price inflation is set to remain high in the next two quarters as the base effect of a stall in house prices in Q2 2020, when the market was closed, boosts the annual comparison. But it is likely to ease off materially in Q4. (See Chart 4.) As a result, our new annual house price forecast is +3.0% y/y in Q4 2021 and +2.5% y/y in Q4 2022. The details of all the main components of our new housing view are given below in Table 1.
Chart 3: Unemployment Rate (%)
Chart 4: Nationwide House Price Index
Sources: Refinitiv, Capital Economics
Source: Refinitiv, Nationwide, Capital Economics
Table 1: CE Forecasts
GDP (% q/q)
GDP (% y/y)
Unemployment Rate (%)
Completed Transactions (000s)
Completed Transactions (% y/y)
Mortgage Approvals for House Purchase (000s)
House Prices (% y/y)
Sources: Refinitiv, Capital Economics 1 % y/y in Q4
Andrew Wishart, Property Economist, +44 (0)7427 682 411, email@example.com