Savills revises up its UK mainstream house price forecasts for 2020 and beyond

Previous UK recessions have been associated with house price falls, but 2020 looks set to be the exception as demand exceeds supply being brought to the market, according to real estate adviser Savills, which today issued revised forecasts for 2020-2024. 

Furthermore, expectations that interest rates will now stay lower for considerably longer will underpin five-year growth despite the heat coming out of the market in 2021, the firm believes.

The high volume of deals being agreed, and the increase in mortgage approvals, also suggest that transactional activity will recover a lot of the ground lost during lockdown, despite some transactions being pushed into next year due to delays in the mortgage and conveyancing process.

In its revised forecasts Savills anticipates average UK house price growth of 4.0% this year.  As furloughing unwinds and Brexit uncertainty comes to the fore, the momentum in the market is expected to slow, despite further government support for the economy.  And while the end of stamp duty holiday in March is likely to support prices and activity in the first quarter of 2021, full year growth is expected to settle around zero next year, with market conditions in the remainder of 2020 set to be more challenging given increasing levels of unemployment. 

Over the full 2020-2024 five year forecast period, price growth is projected to total 20.4% across the UK as a whole as the economy improves and low interest rates support affordability.  This is a significant upgrade on the firm’s previous forecasts issued just five weeks after the housing market began to reopen, of falls averaging -7.5% this year, followed by a rebound in 2021 and 15.1% across the five years.

“While we clearly can’t ignore the economic backdrop, other factors, including a stamp duty holiday, have unleashed an unexpected wave of activity in the market and added to the pent up demand coming out of lockdown,” said Lucian Cook, Savills head of residential research.

“Many people are reassessing their work-life balance, seeking a change of location or a trade up the ladder.  The unexpected stamp duty holiday has given a further boost to the market particularly in higher value locations through the commuter zone and lifestyle relocation hotspots.

“The end of that stamp duty holiday and a projected rise in unemployment are expected to cause the market to slow in 2021, with the very real prospect of price falls at points during the year, hence our forecast of zero annual growth.  But from a mortgage affordability perspective, a fall in the income growth forecast has been outweighed by the expectation of a continuation of ultra-low interest rates over our forecast period as a whole.  That provides more capacity for house price growth over the medium term, tempered by the impact on loan to income ratios and mortgage deposit requirements.”

Savills 2020-2024 Mainstream House Price Forecasts (revised September 2020)

Savills Research

(IMPORTANT NOTE: The equity rich prime markets, broadly the top 5%-10% of homes by value, perform differently.  New forecasts for this sector will follow in Q4)

The trends in buyer behaviour seen since May are expected to dictate the pattern of house price growth over the remainder of this year and early part of next.  That points to stronger growth in London’s hinterland, as buyers reassess their work-life balance and relocate or upsize for more indoor and outdoor space.

Over the five year forecast period as a whole, the regional pattern of price growth is expected to reflect the stage the UK was at in its housing market cycle prior to Covid-19, pointing to the markets further from London being the strongest performers over the mid-term, with the North West at 27.3% and Scotland at 25.4%, for example.  London’s forecast has been upgraded to 12.7%, from 4.4%.

The outlook for transactions:

The mini boom in the housing market points to far higher levels of transactional activity in 2020 than previously anticipated, Savills believes.  Data from TwentyCi indicate that the total number of sales agreed to the end of August exceeded those in the same eight months last year, despite the significant falls during the period of lockdown.   Indications are that September will be another strong month for sales agreed, though this will take time to feed into completed sales.

Savills now expects 2020 transactions to total around 1.06 million, up from a figure of 775,000 originally forecast as we emerged from lockdown and prior to the stamp duty holiday announcement.  Given delays in completing sales agreed this year and a rush to beat the end of the stamp duty holiday in March, completed transactions are expected to increase to over 1.2m in 2021, despite weaker underlying market conditions over the remainder of the year.

“High activity levels reflect a combination of factors,” said Cook.  “A release of pent up demand during lockdown, much greater commitment from buyers who’d been cautious about trading up the housing ladder in the period since the EU referendum, and demand from those making bigger lifestyle changes given their experience of lockdown, are all playing a role.”

But, Savills notes, the economic backdrop and constraints on new borrowers, means that conditions favour those with equity, creating a market dominated by mortgaged home movers and cash buyers.

The Savills forecasts are based on economic projections from Oxford Economics, which anticipate that interest rates will remain at 0.10% through 2023, rising to just 0.25% in 2024, with unemployment falling from 6.5% this year to 3.6% by the end of the forecast period.

Acknowledging the challenges of forecasting in the current environment, Cook said: “The pace of economic recovery and the government’s policy response, together with the progression of Covid-19 and the search for a vaccine, mean the outlook for the housing market will inevitably continue to change.”