Will the V shaped recovery last? - Capital Economics
UK Housing

Will the V shaped recovery last?

UK Housing Market Update
Written by Hansen Lu

The housing market recovery has exceeded all expectations and we have substantially upgraded our 2020 house price forecast. But as pent up demand runs out, a weak economy, tight credit conditions and the end of the stamp duty cut will hold back further growth. We now expect prices to stagnate in 2021.

  • The housing market recovery has exceeded all expectations and we have substantially upgraded our 2020 house price forecast. But as pent up demand runs out, a weak economy, tight credit conditions and the end of the stamp duty cut will hold back further growth. We now expect prices to stagnate in 2021.
  • Mortgage approvals for house purchase rose to 66,000 loans in July – broadly in line with the pre-virus level. Meanwhile, data from the Nationwide show house prices surging by 3.8% since June, leaving annual growth at 3.7% y/y in August. Both have exceeded expectations and point to a V-shaped recovery.
  • Over the next few months, house prices may rise a little more. RICS data show new buyer enquiries recovering strongly in July, which will influence sale prices in September and early October. Moreover, Google search data show that, even at the start of September, buyer interest was still elevated compared to its pre-virus level. (See Chart 1.)
  • That said, we think the surge in demand will not last. Coronavirus restrictions on house purchase lasted less than two months and were lifted nearly four months ago. So any pent-up demand is probably close to expended. Moreover, many buyers entered the market in search of lower prices post-lockdown. With prices rising instead, many may abandon their search or wait for more favourable conditions.
  • In the near-term, as pent-up demand subsides, conditions will increasingly reflect underlying housing demand, which remains weak. On top of that, lenders are still nervous about the outlook for house prices. That will weigh on mortgage availability – especially for first-time buyers.
  • As a result, we think weakening demand will cool house price growth next year. But we don’t think next year’s weakness will lead to a fresh fall in prices. After all, valuations are being supported by affordability, which will stay extremely favourable due to low interest rates. Also, lenders’ approach to forbearance has improved since the last crisis. (See our Focus.) So even with the mortgage holiday scheme to end soon, we don’t expect repossessions to rise nearly as high as was seen during the global financial crisis. The relatively low number of forced sellers we expect will keep house price falls in check.
  • In fact, looking more broadly, one of the long-run effects of the pandemic has been to trigger a structural increase in housing demand. After all, we recently concluded that the surge in working from home will in part be sustained, which will in turn reduce future commercial property demand. (See our Focus.) The other side of this is that, with the workplace in part shifting from offices to homes, long-run residential property demand will rise. We will take a detailed look at this trend in an upcoming Focus.
  • Taking all this together, we have substantially upgraded our 2020 house price forecast, and now expect a 4% y/y rise. (See Chart 2.) Beyond that, the outlook for the housing market will be strongly influenced by the path of the economic recovery, but also government policy. Our best guess is that, as pent-up demand is expended and the end of the stamp duty holiday chills buyer interest, house price growth will slow to a standstill in 2021.

Chart 1: Google Searches for Property Portals (Index)

Chart 2: UK House Prices (% y/y)

Sources: Google, Capital Economics

Sources: Nationwide, Capital Economics


Hansen Lu, Property Economist, 020 7808 4988, hansen.lu@capitaleconomics.com