Pandemic impact on market has further to run

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.

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%, which provides additional resilience for existing borrowers.

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.