A Review of the Property Market 2021-22

Where we are now, where we could have been and where we’re going…

Foreword

In property, how useful would it be to have access to a crystal ball that could help forecast the future?

The questions we would all no doubt like to know the answers to would be how long the current market will continue? Will there be further boom? Or could there be a crash?

It has always been difficult to forecast these things. But perhaps this year it is more difficult than ever.

We’ve put together this review to look at some of the events in property over the last year or so, to briefly consider what might have happened and to try and look ahead at where the property market might be going over the next year.

And whilst there was no crystal ball available, we have used data, previous events and 30 years of accumulated ‘property market instinct’ to try to predict what might be happening. I hope you find it interesting and useful.

Jonathan Rolande

Director, House Buy Fast

Introduction

An Incredible Market in an Extraordinary Year

It is something of an understatement to say that 2021 has been yet another extraordinary year for the property market.

Go back not too long ago and many forecasts suggested that the market had peaked, that it would start to slow and that prices would fall.

In 2015 consultancy CEBR predicted house prices would start to fall – by 0.6% or 3.3% in London – before making only very modest gains in the years ahead.¹

Then came Brexit and Covid. Both ‘black swan’ events, a surprise with major impacts that most people would have expected would lead to a market crash.

In mid-2020 the Office for Budget Responsibility (OBR) ‘worst case’ forecast was for prices to fall 2.4% in 2020 and a very substantial 11.7% in 2021.²

In fact the reverse has happened. House prices have reached record levels. Some areas have seen price rises of almost 30% in just one year.

The market has proved not only to be resilient but it has exceeded all expectations. Something which surprised expert forecasters and ordinary buyers alike. Buyers and investors showed they had, almost bizarrely, not less but actually more confidence in the market in difficult times.

The property industry also showed that it could still transact business in difficult times. It actually helped to rejuvenate the market, and speed up the introduction of new technology in property. When many businesses were forced to close during lockdown, estate agents and conveyancers continued with innovation at the heart of the business.

The Stamp Duty holiday and other financial support offered by the Government proved to be a revelation too. While ostensibly introduced to support the market it showed that what was actually quite a small stimulus in the market can enhance a major surge.

So what might this mean for the future? It suggests that there is perhaps more confidence in the property market, and that it is more resilient, than most of us expected. It suggests that it takes a lot to damage the market, and not very much to cause it to boom.

The Economy

So Far, So Good?

The performance of the economy is fundamental to the performance of the property market. Stronger economies mean more jobs and more disposable income which encourages people to buy for the first time or move up the ladder. A strong economy also inspires confidence in the property market, and vice versa.

Forecasts for the world economy pre-Covid were very negative in any case. In 2019 the UN reported that global recession was a serious danger in 2020, with several countries being in or close to recession.³ 2020 saw most world economies not just slow but stop. Furlough and other support schemes kept the economy in the UK going to some extent, with some of that money no doubt finding its way into the property market.

In 2021 the economy has rebounded more strongly than most might have expected. Sectors such as High Street retail and hospitality, with all the employment they provide, returned from a complete shutdown. Recent growth figures are more modest, however. Official figures show that the economy grew by 5.5% in the second quarter of 2021 but only 1.3% in the third quarter.⁴

Employment levels are currently quite positive. The UK employment rate of 75.3% in October was only 1.3% less than before the pandemic.⁵ The mass unemployment that some forecast does not seem to have materialised, at least as yet.

Both these factors would tend to indicate there could be further growth potential in the property market.

There are however some factors within the economy that have not come into play in recent times and which could impact the market:

Inflation. For many years inflation has barely been a consideration, but it is now becoming a significant factor. The Bank of England suggests that the current inflation rate of 4.2% could top 5% in 2022.⁶ Inflation hits everyone’s spending power, including in the housing market, and affects confidence. Its impact could however be softened by wage growth.

Higher taxes. Taxation also hits affordability both for buyers and investors. The National Insurance rise will affect pay packets from April 2022. Many will be wondering what other tax increases might be in the pipeline for the year ahead. Changes to Capital Gains Tax, for example, have been rumoured for some time.

Interest Rates

The Only Way Is Up

Interest rates directly affect property affordability. They also impact sentiment in the market. Buyers are less likely to stretch themselves if they feel rates are on an upswing.

The property market and property buyers in the UK have grown accustomed to cheap mortgage money since about 2009. Significant rises have been anticipated for several years but, apart from some small and quickly reversed rises in 2018, have not materialised.

Many experts expected significant interest rate rises in 2019 and 2020. However the Covid-related interest rate reduction in 2020 has resulted in some of the cheapest ever UK mortgages.

Now it seems that the uncertainty over interest rates which has prevailed over the last few years is over and mortgages WILL become more expensive. Reliable forecasts suggest that the Bank of England will raise the base rate by 0.15% later this year, and by 0.25% in both spring and autumn 2022.⁷

A rough, back-of-an-envelope calculation suggests that a 0.5% increase in the interest rate payable could increase repayments on a £300,000 mortgage balance by around £70 per month.

So although the popularity of fixed interest rate mortgages in recent years may delay the impact it is pretty much inevitable that the effects of higher mortgage rates will start to be felt in the market in 2022.

Housing Supply

Too Many People, Not Enough Homes

Supply and demand are key players in the property market. Simple economics dictates that the more demand there is for homes to buy and rent relative to supply the higher prices will grow.

The UK generally has had a severe housing shortage for many years. Causes include failure to tackle the problem by successive Governments, a failure to build enough social housing (alongside Council house sell-offs) and a planning system which has tended to hamper new housing development.

The present Government has a commitment to massively increase housing supply, by around 300,000 homes a year. If this policy is successful increased supply could cause property prices to stabilise or potentially fall, especially when combined with other factors.

Currently, however, there still a shortage of supply and likely to be so for several years. So rising supply is unlikely to impact house prices much in the short to medium-term.

A Housing Briefing from the BBC estimates that in recent years 1.2 million fewer homes have been built than have been needed. ⁸

The housing charity Shelter estimates that 3.1 million social homes alone are needed over the next 20 years. ⁹

A relatively new factor that might impact housing supply over the coming years is the rising costs of construction due to materials and labour costs. Estimates from the Building Cost Information Service say that the cost of building materials for an average house rose 14% between January and September 2021.¹⁰

Demand Trends

The House of The Future?

Demand is another factor that impacts the property market. The market changes over time according to the type of homes people want to rent and buy.

The appetite for home ownership still appears to be as strong as ever. Indeed, Covid seems to have strengthened the desire to own property.

Patterns of demand appear to have changed over the last two years, however. Factors affecting demand trends might include the movement towards working from home. Buyers also seem to be favouring countryside and coastal locations, and larger properties, while traditional commuter areas and city living property, especially smaller flats, fell in popularity during lockdowns. Central London property was particularly impacted by the closure of offices and lack of foreign visitors, buyers and tenants.

Agents are reporting that patterns of demand are normalising to some extent at the moment. Rightmove says that demand and rents are rising as buyers return to city life.¹¹ But it is as well to bear in mind that what people want to buy and rent, and where, could still change significantly over the coming years.

Prices and Price Forecasts

Anyone’s Guess?

House prices have long been a subject of fascination and one where a crystal ball to forecast future prices would be very useful.

UK house prices have broadly been on an upswing since the financial crisis of 2008. As we have already discussed some commentators have been forecasting a price correction, or in some cases even a crash, for several years.

Covid also brought with it some forecasts of a market crash. However, this year price rises have beaten all records in most parts of the country, with the possible exception of some pockets of London.

The average UK property price in September 2021 had reached almost £270,000, an 11.8% rise in a single year, according to HM Land Registry figures.¹² Some areas have seen extraordinary price rises. For example, the Scottish Borders region saw a 29.4% rise in property prices in the year to summer 2021.

So where are prices going next? Many forecasts suggest they will carry on rising, if at more modest levels than the last year.

The OBR suggests house prices will have risen by 8.6% by the end of this year, and will then rise 3.2% in 2022, 0.9% in 2023, 1.9% in 2024, 2.9% in 2025, and 3.5% in 2026.¹³

Agents and consultants Strutt & Parker forecast house prices UK wide will rise at least 2% next year up to a maximum of 7%. Over the next five years they say prices will rise at least 20% and possibly up to 35%.¹⁴

A National Association of Property Buyers survey of 400 potential house buyers says that 21% of those buyers expect house prices to rise by 1-5% next year and 34.5% of them expect a 6-10% rise. Only 8.5% of them expect prices to be broadly unchanged.

In normal times these price forecasts might be considered reasonable. However in a market that has proved buoyant through extraordinary times few would bet against them being exceeded. A sensible conclusion might be that future prices are really anyone’s guess at the moment.

A report in This Is Money quoting a housing market economist Fred Harrison¹⁵ predicts a house price crash in 2026. Harrison makes his prediction on the basis that house prices follow approximately 18 year cycles. He predicted house prices falls in both 1990 and 2008 and therefore forecasts a crash in five years.

The Lettings Market

Goodbye to Buy To Let?

The residential lettings market has been an important part of the property market since the 1990s, and particularly since buy to let mortgages became readily available. The lettings market provides millions of people with a home. It is a major source of business for many developers and agents. It has attracted buy to let investors large and small, some of whom look at it as a ‘property pension’.

However rents and yields have been under pressure for some years now as property prices have risen but rents have not kept pace in many areas.

Covid could have created a widespread problem where landlords were unable to collect their rent or evict tenants, yet still had their own financial commitments. Furlough and other support schemes moderated what could have caused a collapse in the lettings market.

Covid aside it is no secret that rental market has become tougher for landlords and investors in recent years. Section 24 mortgage interest relief restrictions first announced in 2015 seemed to herald the start of a new era in which buy to let would be purposely made less financially attractive by the Government.

The legislative burden has increased in recent years too. The wider use of licensing, tighter EPC standards for rented homes and electrical safety checks are but a few examples. The delayed Renter’s Reform Bill, now likely to emerge in 2022, is likely to have few real positives for landlords.

But while the lettings market maybe doesn’t look quite as good as it did there are still strong fundamentals.

Demand for rented accommodation is strong, reflecting the housing shortage. Rents and so potentially yields are rising again. Zoopla says that rent increases have hit a 13 year high as demand in major cities has doubled.¹⁶

Very importantly, investors and landlords still seem to have confidence in the lettings market. A survey by Paragon Bank says that for the first time in four years the proportion of landlords looking to expand their portfolios is higher than the percentage who are looking to reduce it.¹⁷

It’s probably fair to say that the lettings market is at a crossroads right now. The days of easy money for amateur landlords may be numbered. Well organised professional landlords are still likely to see opportunity in the market however, particularly if they expect capital growth thanks to a strong sales market.

Government Policy

What’s Next?

Government policy is something that can impact the property market both directly or indirectly. Property-related legislation can have a direct impact. Taxation can have both a direct and indirect impact.

Key Government milestones that have shaped today’s housing market include the failure of successive administrations to boost housing supply, Right to Buy and assured shorthold tenancies. So what could be some of the Government policies that could affect the property market over the next couple of years?

The recent low interest rate regime and Stamp Duty holiday perhaps suggested that the Government consider that the property market is too large and important to be allowed to fail. What might they do if there is another economic shock?

Buyer incentive schemes like Help to Buy and others now seem to be an established feature of the property market. Could they be extended? What might happen if they were ever stopped?

The ‘levelling up’ policy of the current Government to rebalance the economy of the north and the south might be one to watch. Could it actually level up the property markets in historically lower cost parts of the country? That is, if it actually happens. Major rail projects in the north have recently been cancelled.

Planning reform. How much impact will measures to boost housing supply have? Some minor extension of permitted development is already in place, but a Planning Bill to make it easier to build new housing has been delayed.

The next General Election will be in autumn 2024 at the very latest. Could there be any new policies to keep the property market going?

Conclusion

“The property market turmoil of recent years and its unexpected consequences highlights the risk of predictions. However, this much can be safely predicted…

The law of supply and demand indicates 2022 will be a strong market for sellers, and we will see an increase in prices. Not double digit as in recent times, but perhaps around 4%.

We will see the balancing of the market continue to gain traction as working from home becomes even more normalised and allows workers to live further from traditional employment hubs.

Although unlikely to impact in 2022, the Government should be mindful of growing disillusion amongst young people who feel ever-further from the dream of owning a property. This potentially vote-losing issue will almost certainly lead to further assistance for first-time buyers in 2023, further distorting the market.”

Jonathan Rolande

Director of House Buy Fast

Jonathan has worked in the property sector since 1988. House Buy Fast purchases hundreds of properties annually, often those affected by difficult circumstances such as lease issues, structural problems or disrepair.

A well-known industry commentator, Jonathan has recently been featured in opinion pieces for The Sun, Daily Express, Reuters and The Huffington Post.