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Tue 26 Oct 2021

UK House Price Index

+6.6% Current  UK  house price  growth +3% UK house  price growth  in  2022 Executive  summary 1.2m Completed  housing transactions  in  2022 • 2021 a record  year  with  sales  set  to  exceed  highs  of  2007  (1.5m) and over  £473bn  of  new  sales  agreed  -£95bn  higher  than  2020. • No sign of  any  cliff  edge  in  demand.  The  impact  of  the  pandemic on activity  has  further  to  run  -albeit  at  a  less  frenetic  pace. • Further  room  for  above  average  price  growth  in  most  affordable housing  markets  where  the  current  rate  of  growth  is  highest. • The primary  headwinds  in  2022  will  come  from  higher  living  costs and increased  mortgage  rates  which  will  impact  buying  power. • UK house price  growth  to  slow  to  +3%  over  2022  with  1.2m  sales. • House price  growth  will  be  greatest  in  the  North  West  and  East Midlands  (+4%)  and  lowest  in  London  (+2%). “The  impact of the pandemic  has further  to  run.  The current  momentum in  the  market will largely  offset growing headwinds over  2022  with average  UK house prices  increasing  by 3% and 1.2m sales. ” Richard  Donnell Executive  DirectorSeptember  2021  |  UK  House  Price  Index  | Page  2 Record  year for  sales  and prices  -no cliff  edge +6.6% Annual  UK  house price  growth Welcome to  the  annual  forecasts'  edition  of  our  house  price  index report.  The  housing  market  has  certainly  outperformed  our forecasts  from  a  year  ago.  It  is  set  to  record  the strongest  year  for sales  and  house  price  inflation  since  2007  with  £473bn  of  new  sales agreed  in  2021,  £95bn  higher  than  2020.  This  is  a  result  of  the ongoing  national  re-evaluation  of  housing,  low  mortgage  rates  and the  additional  boost  from  the  extended  stamp  duty  holiday. The  strength  of  market  conditions  are  not  a  result  of  the  stamp  duty holiday  alone  and  greater  forces  are  shaping  the  market. This  is  evidenced  by  the  fact  that  there  has  been  no  sign  of  any  cliff edge in  demand  for  homes  which  continues  to  run  25-30%  above  the 5-year  average  since  the  summer.  Demand  looks  set  to  end  the  year more  strongly  than  last  year  and  we  expect  this  to  carry  into  2022. UK house  price  growth  is  currently  running  at  6.6%  with  all  countries and regions  of  the  UK  registering  growth  rates  well  ahead  of  the     5-year  annual  average  –see  chart  below.  London  is  registering  the lowest  rate  of  price  inflation  (2.3%)  and  is  the  only  regions  where growth  is  below  the  5-year  average  with  demand  for  homes  in  the capital  hit  hardest  by  the  pandemic. Clear  evidence  of  a slowdown in rate of price inflation Demand for  homes  has  not  been  uniform  over  the  last  18 months. Our  analysis  shows  that  the  mix  of  home  buyers,  and  pricing  of homes sold,  has  shifted  markedly  over  this  time.  The  mix  of  buyers  is starting  to  return  to  normal  as  the  economy  re-opens  and  mortgage availability  improves.  However,  there  is  clear  evidence  of  slower growth  in  the  value  of  homes  where  new  sales  are  being  agreed.  This  marks  a  turning  point  for  house  price  growth  with  a  moderation in  the  rate  of  price  inflation  is  likely  in  Q4  and  as  we  move  into  2022.September  2021  |  UK  House  Price  Index  | Page  3 Current  momentum to outweigh emerging headwinds +28% Buyer  demand  midSeptember  vs  five-year average Looking  ahead  into  2022,  the  outlook  for  price  inflation  and  overall sales  volumes  is  a  balance  of  positive  and  negative  influences. On the  positive  side,  housing  remains  affordable  in  many  markets and competition  amongst  lenders  will  remain  intense,  even  if mortgage  rates  increase.  A  continued  scarcity  of  homes  for  sale  will remain  well  into  2022  in  our  view,  supporting  headline  price  inflation. In  addition,  our  analysis  shows  that  the  impact  of  the  pandemic  on home buying  decisions  has  further  to  run.  This  will  be  supported  by the  scale  of  the  financial  gains  homeowners  have  seen  in  the  value of  their  homes  since  2020 which  will  bring  sellers  into  the  market. The  main  headwinds  will  come  from  increases  in  the  cost  of  living, higher  levels  of  inflation  and  tax  increases  in  2023.  A  modest  rise  in mortgage  rates  is likely  in  2022  and  will  impact  household  buying power.  The  main  market  related  challenges  stem  from  unrealistic expectations  on  pricing  on  the  part  of  new  sellers  and  a  lack  of homes putting  off  new  entrants  both  of  which  are  lower  risk  in  2022. Further  room  for  growth  in  most  affordable  markets The  affordability  of  housing  is  important  but  no  guarantee  of activity  and  rising  prices.  In  many  parts  of  the  UK  housing  remains affordable  by  historic  standards.   The  chart  shows  that  the  regions and countries  with  the  highest  growth  rates  are  the  most  affordable -measured  by  the  house  price  to  earnings  ratio. We believe  there  is  headroom  for  further,  above  average  house price  inflation  in  regions  outside  southern  England.  However,  while affordability  levels  have  improved  by  10%  in  London  since  2016, affordability  remains  well  above  the  long  run  average  –this  will continue  to  limit  level  of  price  rises  in  the  highest  value  areas  of London  and  southern  England  in  2022  and  beyond.September  2021  |  UK  House  Price  Index  | Page  4 Pandemic impact on market has further  to run 22% UK households  eager  to move in  next  18 months as  a  direct  result  of  the pandemic It  is  now  clear  that  the  impact  of  a  global  pandemic  on  the  UK  housing market  was  not  going  to  be  short  lived.  We  believe  the  impact  of  the pandemic  has  further  to  run  into  2022,  supporting  market  activity  and sales  volumes.  The  primary  catalysts  will  be  an  ongoing  re-evaluation of  housing  needs,  increased  housing  equity  and  moves  in  parts  of  the labour  force  to  more  hybrid  working.  Zoopla  Research  recently  conducted  a  nationally  representative survey  of  UK  households  which  found  that  22%  remain  ‘eager’  or  ‘very eager’  to  move  home  in  the  next  18 months  as  a  direct  result  of  the pandemic.  It  is  important  not  to  overstate  the  impact  of  the  pandemic, however.  The  same  survey  found  60%  stating  no  change  at  all  in  their motivations  to  move  which  is  not  surprising. The  survey  revealed  a  clear  split  in  the  desire  to  move  between younger  households  and  growing  families  and  older,  more  established households  who  are  settled  in  their  current  home.  In  addition,  those eager  to  move  tend  to  be  located  in  city,  suburban  and  large  towns and those  households  who  expect  changes  in  their  working  patterns. The  primary  motivation  of  those  eager  to  move  was  their  current  home not  being  suited  to  their  requirements  (46%).  This  was  followed  by personal  motivations  e.g.  to  be  nearer  friends  and  family  (28%)  and finally  expectations  of  changes  in  working  patterns  (18%). With  full-scale  national  lockdowns  seemingly  behind  us,  the  shift  to more  hybrid  working  for  many  office  workers  is  likely  to  be  a  key catalyst  of  housing  decisions  and  choices  as  we  move  into  2022. After  a  record  year  for  sales  in  2021  we  expect  UK  housing transactions  to  decline  by  20%  to  1.2m  in  2022.  This  is  in  line  with  the long  run  average  but  still  relatively  high  compared  to  sales  volumes over  the  last  decade.  We  do  not  see  any  important  regional  or  country variations  with  sales  tending  to  track  in  line  with  the  national  average. September  2021  |  UK  House  Price  Index  | Page  5 Higher  mortgage rates  impact buying  power and activity more than prices Low mortgage  rates  have  become  an  important  feature  of  the  housing market  over  the  last  decade  and  a  support  for  higher  house  prices. Home buyers  have  become  used  to  low  mortgage  rates  which  have ranged  between  2%  and  3%  since  2015,  hitting  a  low  of  2.1%  in  H2  2020. It  is  important  to  note,  however,  that  the  regulation  of  mortgage lending  from  2014  onwards,  has  stopped  lower  borrowing  costs  from creating  an  unsustainable  boom  in  house  prices.  The  market  is  better insulated  from  higher  mortgage  rates  than  in  the  past  but  not  immune. The  consensus  among  economists  is  that  interest  rates  will  increase over  the  coming  year  as  central  banks  scale  back  on  support  for  the economy and  look  to  normalise  interest  rates  and  manage  inflation. Our  projections  assume  mortgage  rates  will  reach  3%  by  the  end  of 2022  -the  highest  level  since  2015  but  still  low  by  historical  standards.  There  are  two  aspects  to  consider  with  higher  mortgage  rates  -first, how they  impact  new  buyer  demand  and  second,  the  impact  on  the existing  11m  mortgaged  home  owners. Any increase  in  borrowing  costs  will  impact  the  buying  power  of  new purchasers  but  this  all  depends  upon  how  much  rates  increase.  Our analysis  suggests  that  an  increase  in  mortgage  rates  to  3%  will  not have  a  major  impact  on  the  price  buyers  could  pay  for  homes  but  any increase  in  rates  could  deter  some  would-be  buyers  and  impact  sales. Existing  borrowers  have  more  protection  from  higher  mortgage  rates. Over  80%  of  outstanding  mortgages  are  on  fixed  rated  rates,  many  for 5 years  or  more.  Furthermore,  all  new  borrowers  since  2014  have  had  to prove  to  the  lender  that  they  can  afford  a  mortgage  rate  of  up  to  7% (see  chart)  which  provides  additional  resilience  for  existing  borrowers.September  2021  |  UK  House  Price  Index  | Page  6 Strongest  price  growth  in  regional  markets  in  2022 Nationally  we  expect  average  house  prices  to  increase  by  3%,  down from  an  annual  growth  rate  of  6%  at  the  end  of  2021.   The  upward momentum in  prices  over  2020 and  2021  has  been  created  by  the initial  impact  of  the  pandemic  and  artificial  stamp  duty  holiday deadlines  over  2021  -factors  that  will  not  repeat  themselves  in  2022. Together  with  our  expectation  of  a modest  increase  in  mortgage  rates, we believe  the  net  result  will  be  a  moderation  in  the  rate  of  growth  to more  sustainable  levels. Any national  average  will  always  have  a  variation  at  sector  and geographical  level.  Today,  house  prices  are  rising  by  over  10%  per annum in  northern  towns  such  as  Blackburn  and  Rochdale  while  price growth  remains  marginally  negative  in  most  central  London  boroughs. The  growth  rate  between  flats  and  houses  has  widened  over  2021  and we expect  the  rate  of  price  inflation  for  flats  to  remain  weaker  over 2022  as  buyers  continue  to  prioritise  space. At  a  region  and  country  level,  we  expect  house  prices  to  continue  to increase  at  an  above  average  rate  in  regional  housing  markets  over 2022,  albeit  at  a  slower  pace  than  currently.   The  fastest  growing markets  are  expected  to  be  the  North  West  (4%)  and  Wales  (4%)  with below  average  growth  of  2%  in  London  where  affordability  factors  will limit  growth  in  the  near  term.  We remain  more  cautious  on  the  prospects  for  London  in  the  very  short term  where demand for  homes  and  house  price  growth  are  lagging  the national  trends.  There  is  clear  evidence  of  tightening  supply  which  will support  the  recovery  once  we see  a  stronger rebound in demand.  In the  near term London  looks  set  to  record  below  average  levels  of house  price  growth. September  2021  |  UK  House  Price  Index  | Page  7 House Price  Index  –Country,  region  and city  summary Note:  The  Zoopla  house  price  index  is  repeat  sales-based  price  index  using  sold  prices,  mortgage valuations  and  data  for  agreed  sales.  The  index  uses  more  input  data  than  any  other  and  is designed  to  accurately  track  the  change  in  pricing  for  UK  housing.September  2021  |  UK  House  Price  Index  | Page  8 Zoopla House  Price  Index, city  summary Sept.  2021 Source:  Zoopla  House  Price Index.  Sparklines  show  last  12 months  trend  in  annual  and monthly  growth  rates  –red  bars are  a  negative  value  –each series  has  its  own  axis  settings providing  a  more  granular  view on price  development. Contacts Recent  publications UK Rental Market Report 2021  Q1 If  you  have  any  questions  please  do  get  in  touch