House prices have been immune to the turbulent economic conditions… so far
House prices have risen experientially since the start of the pandemic, largely fuelled by the government’s introduction of the stamp duty holiday.
However, since then, the cost-of-living crisis has plagued the market, but prices have shown no signs of wilting.
“While most people predicted that house price growth would slow as we moved into 2022, I forecasted at the end of 2020 that we would see strong growth not just in 2021, but also in 2022, with both years likely to see increases in house prices at 8-10% higher for new builds,” said Stuart Law (pictured), chief executive of the Assetz Group.
Law explained that the reason for his confidence was that he believed the demand for housing would be impacted by the pandemic, driven by homeworking and the need for space for an extended period, combined with the economic impact of the pandemic keeping interest rates relatively low. Indeed, he seems to have been right to date - the ONS HPI reported this month UK average house prices increased by 12.4% over the year to April 2022.
As it currently stands, he said, house prices have been immune to the turbulent economic conditions seen so far this year.
“Modestly rising interest rates and inflation have pushed up build costs for developers,” Law said.
These long-term pressures on the construction industry have been further exacerbated by supply chain issues and high material costs triggered by Brexit and the pandemic. However, Law said that demand from buyers who want lifestyle changes post pandemic is still very strong and interest rates remain historically low, regardless of recent rises. Added to this, the supply of new homes remains significantly constrained.
Law believes these factors are supporting price growth and, at the moment, they are proving more powerful than cost-of-living pressures.
“I expect prices to remain robust, at least until the end of the year. However, the rate of growth is likely to finally slow down in the winter, which is traditionally a quieter period, as energy costs and inflation generally subdue demand to at least to some degree,” he added.
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According to Law, 2023 could easily see house price growth stay in positive territory due to low supply - but it is far less certain given other factors.
What’s driven the increases?
Looking to why house prices have continued to rise despite difficult market conditions, Law explained that the housing sector has had to manage a large amount of economic uncertainty in recent years, including rising interest rates, Brexit, supply chain issues and labour shortages to name a few. This, he believes, has pushed up costs for the construction industry and fundamentally, as build costs rise, pricing has also pushed up.
“At the same time, throughout the pandemic, we saw an unprecedented demand for house moves, spurred on by policy interventions like the Stamp Duty Land Tax (SDLT) holiday and the race for space,” Law said.
The current energy crisis has also encouraged people to move to homes that are more energy and cost efficient.
“These changes in people’s lifestyle priorities have proved immensely powerful and have inevitably driven up demand for housing, particularly better insulated new builds, despite other economic pressures on household budgets,” added Law.
However, despite this increased appetite for housing, Law said the market is also in the midst of a housing crisis. The government missed its housing target by around 40%, which is around 120,000 new homes not built this year.
As a result, Law explained that there is simply not enough housing to meet current demand, which further supports price growth.
“Finally, interest rates have continued to increase, and some believe this rise could eventually see rates push above 3% - however they are still low by historic levels, and we suspect they could see a rapid reversal back down as soon as late 2023, that is if we see any sustained economic weakness,” Law said.
While incremental interest rate rises and cost-of-living pressures will impact buyers at the lower end of the affordability scale, Law believes there is still a critical mass of buyers that can finance purchases at high prices through affordable mortgages.
Will there be a tipping point?
Law went on to say that this month the Halifax house price index challenged the expectation of a slowdown in house price growth and, as it stands, house prices are still resistant to economic conditions.
“However, as we move forward, it is inevitable that the squeeze on incomes will start to have an impact on growth,” Law said.
He is expecting the tipping point to come towards the end of 2022, with the next increase in energy bills and ongoing inflation, along with the normal market slowdown in autumn and winter.
“Ultimately, I still expect house prices to continue breaking records through 2022. That said, I do think there is a potential for inflation to recede quite quickly from what is looking like an inflationary peak in late 2022 early 2023,” Law added.
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Macroeconomics cannot be controlled, but Law outlined that the market must look at what it can do to create a better housing market through dramatically increased supply.
He believes the market needs to facilitate more stable price growth with less dramatic peaks and troughs, and that it must meet the housing needs of the entire population in terms of quantity, quality and affordability. In tandem with this, Law said the industry also needs to tackle planning and broaden market competition by growing the SME sector.
“We need to provide better and broader bespoke financing structures for the industry. This will ensure the market is more robust against economic headwinds, able to up its output and better balance supply with demand to even out pricing in the long term,” he concluded.
