There’s good and bad news for the UK housing market, with short-term struggles offset by long-term recovery. How will the economic backdrop affect the sector?
National estate agency Savills, which annually publishes comprehensive five-year housing market predictions, has revised its outlook in light of the coronavirus pandemic. The new research shows several changes compared to its original November 2019 forecast.
One of the main factors affecting housing market recovery is, of course, the speed of the country’s economic recovery. Savills’s latest report takes this into account, with GDP set to fall 8.3% in 2020 before a rebound in 2021. On an economic level, income growth is also expected to play a part in both house price outlook and transactions.
Interest rates are another marker for predicting the market. The Bank of England base rate is currently at a historic low of 0.1%. This is expected to remain the case until 2022, according to Savills.
The outlook for house prices
One of the standout points from this report is the deterioration in the short-term outlook for house prices. Across all parts of the country, Savills expects UK house prices to dip by -7.5% over the course of 2020.
However, the firm importantly reveals it is standing by its original five-year forecast, with house prices still rising by 15.1% overall across the UK by 2024. This optimistic outlook is partly down to factors such as better mortgage affordability and pent-up demand supporting the UK housing market.
After the -7.5% fall this year, Savills expects a bounce-back of 5% for 2021. This is followed by house prices rising by 8% in 2022, before returning to a steady 5% and 4.5% for the following two years.
North vs south: how performance will differ
As always, the Savills forecast looks at regional variations across the market. Trends change continually between London, the south-east and the rest of the UK, and house prices react accordingly.
To begin with, house prices will fall at a uniform rate across the UK, says Savills. However, it is during the country’s recovery that we could see some differences becoming apparent.
The report states: “At this stage in the housing market cycle, we would normally expect the Midlands, north, Wales and Scotland to perform strongest, with slower growth in London and the south where values rose faster in the decade preceding the EU referendum. Covid has the potential to change that dynamic in the short term.”
“Different employment sectors have faced different challenges during the lockdown. For some sectors, such as professional, scientific & technology, the impact is relatively mild, with many employees able to work from home. For others, such as accommodation & food service, remote work is not usually an option. Housing markets will recover fastest in regions with more jobs in more resilient employment sectors.”
Therefore, Savills believes London and the south-east will lead the market’s recovery. The higher ends of the market will benefit more from the low interest rates, easing some “affordability pressures”. Furthermore, areas with a heavy reliance on tourism, like the south-west, may see the slowest recovery.
Despite this, house price rises in the north-west will remain in pole position through to 2024. Property values there are forecast to rise by 24.1% over the next five years, unchanged from November’s predictions. Yorkshire and the Humber will see prices rise by 21.1%, followed by Scotland with 20.1% and the north-east with 19.9%.
Brexit still having an impact
Like house prices, Savills expects transaction volumes to have stabilised by 2024, in line with November’s forecast. However, the coming months and years in the short-term could see restricted buying and selling activity, says the report.
“In the short term, weak consumer sentiment will limit any bounce in activity following the housing market reopening. Over the coming years, a higher unemployment rate will impact perceptions of employment and financial security, which hold the key to both house prices and transactions.”
It also points out that the risk of a “hard Brexit” towards the end of 2020 could also affect the market. Business appetite could temporarily reduce, restricting a “rebound in employment”.
But Savills says it is “confident” that activity will still pick up over the course of this year, now the market is unlocked.
It says: “We expect transactions to return to normal levels by 2021 Q3, followed by a year with more transactions than normal as we work through the pent-up demand that accumulated during 2020.”
Overall, while the coronavirus pandemic has certainly changed the landscape for many sectors, at least for the short-term, like with previous global crises, the UK housing market continues to show its resilience.
