Housing market– What the future may look like

When Friedrich Hayek accepted his Nobel prize for economics in 1974, he made a very honest admission. Not only were economists unsure about their prediction, but their tendency to present their findings with the certainty of the language of science was misleading and may have a deplorable effect.

At the start of the pandemic in March 2020, the newspapers were awash with economists predicting a housing market crash and what happened was the opposite. Based on figures obtained from Land Registry, the average house price in the UK has increased from £232,684 to £286,397 since March 2020, an increase of 23 per cent. The warning signs of a significant slowdown are again growing, with analysts and industry insiders forecasting a challenging period for the housing market. We try to understand if this will be different from the pandemic warnings and factors that may influence the future.

The most reliable data we can use to forecast is the data published by the land registry, as it is based on actual homes sold rather than asking price or mortgage lending data as Rightmove and Nationwide or Halifax would do. However, the data published by the land registry has a two-month lag. So, we will also look at some other indices. Nationwide, which uses the mortgage data to publish its findings, reported last week that house prices had grown by 10 per cent in August and 0.8 per cent higher compared with July. This was the tenth month in a row where house prices have risen by double digits.

Nationwide, in its report, also highlights that it expects house price growth to slow substantially over the coming months because of the pressures on households intensifying in the coming quarters. The housing market is complex. Prices are driven by various local, regional, national, and global factors. We look at some factors that may influence house prices in the future.

Energy price cap Increase:

Ofgem, the energy regulator, recently announced an increase of 80 per cent in the energy price cap, which will take effect from 1st October. This will take a typical household average bill to £3,545 a year, compared with £1,277 a year ago. Nationwide calculated the impact of energy price rise equivalent to interest rate rise based on a typical outstanding mortgage. The report estimates that the increase in energy price cap is equivalent to a rise of 1.36 per cent in interest rates. It will cause a substantial squeeze on households and impact their affordability, negatively impacting house prices. 

Interest rates rise:

The record interest rate rises will have an impact on house prices. However, the effects of interest rates rising in the near future might not be as significant as 85 per cent of homeowners are currently on fixed rates, protecting them in the short term. Andrew Wishart of the forecasters believes that areas where house prices are highest relative to income, are most vulnerable. London and Southeast are therefore likely to see the most significant falls across all regions of the UK.

Supply levels are still at a record low:

One of the reasons house prices continue to grow at a record pace is the lack of supply on the market. The estate agent trade body Propertymark reported that an average of 24 properties were on sale per branch in July; this compared to a pre-pandemic average of 51. Rightmove reported a 39 per cent drop in stock levels compared with 2019. The imbalance between demand and supply may lead to house prices remaining stable even though the energy prices and interest rates could hurt house prices in the future.

A weak pound may encourage international buyers:

According to the financial times, the number of homes in England and Wales owned by overseas buyers has almost tripled in the last decades. Andrew Burnell of the firm argues that the pent-up demand from international buyers who were largely absent during the pandemic but could be returning to chase the weak pound could underpin the prime central London market.

Government policy will play a key role:

Government policy set by the new Liz Truss government in the coming weeks could play a key role in how the housing market shapes up in the future. According to the BBC, the government is set to announce a cap on energy prices this week. The cap was due to rise from £1,971 to £3,549 in October. It could hugely impact the inflation forecasts and further interest rate rise.

It will be fair to conclude that the housing market will struggle to keep pace with the growth seen in the last two years, given the constraints households face because of the cost-of-living crisis, the interest rates going up, and wages not keeping pace with inflation. Rightmove says that a combination of affordability constraints and more properties coming onto the market in the second half of 2022 could result in house prices falling slightly in months to come. It predicts a 5 per cent rise by the end of the year. Zoopla, another property selling portal, indicates a minor increase of 3 per cent. Estate agents expect a much slower market in 2023, with Knight and Frank forecasting a modest rise of 1 per cent. One thing that is certain in the property market for 2023 is that nothing is certain.