As we approach the end of 2021, it is worth looking back on a year which has been difficult but ultimately positive for UK house prices. Despite the ongoing challenges of the Covid pandemic, the forecast collapse in property prices failed to emerge. Indeed, after a period of consolidation, UK house prices have actually gone from strength to strength.
House prices and annual percentage growth
When reading about house prices and annual percentage growth in isolation, it is very difficult to get an idea of the trend. The following graph shows two axes. The left one plotting average house prices over the last 12 months against the right showing annual percentage growth. As you can see, despite the huge challenges of the pandemic, annual percentage growth in house prices has remained positive.
Source: Nationwide House Price Index
Over the last 12 months, starting from December 2020, the average house price in the UK increased from £230,920 to £252,687. Since May 2021, with the exception of October at 9.9%, annual house price growth has been in double digits, peaking at 13.4% in June.
Annual inflation and house price growth
As you can see from the graph below, inflation in the UK was relatively subdued back in December 2020 at just 0.6%. Amid concerns that inflation would fall further, there was even talk of a move towards negative interest rates. However, fast forward to November 2021 and inflation now stands at a staggering 5.1%. Indeed, at the recent MPC meeting, the Bank of England announced expectations for inflation to hit 6% in the first half of 2022.
Source: Nationwide House Price Index
When looking at house price growth, it is important to look at relative performance. As you can see from the graph, even taking into account inflation, house price growth in the UK was extremely healthy during 2021. Obviously, inflation will be eating into relative returns and the recent increase in interest rates, albeit minuscule sent a signal to the markets.
It will be fascinating to see how the battle to reduce inflation impacts average house prices in the UK.
Demand for UK property
The UK government stepped in on numerous occasions to offer financial support to the housing market. The most visible of this support was a reduction in stamp duty. This led directly to an increase in activity at the end of March, June and September as extensions were announced. Interestingly, while many people had expected demand to “fall off a cliff” at the end of September, this has not been the case.
We will obviously experience the traditional Christmas lull in activity but experts believe the market will bounce back strongly in the New Year. Looking back to the December MPC meeting, it was interesting to note the lessening impact of new Covid variants on the economy. Despite the fact that the Omicron variant has prompted a number of restrictions, it is not expected to impact GDP and economic activity as much as the earlier variants.
For some reason, property “experts” constantly try to talk down the UK market despite the extremely strong backbone of demand. We saw the same in the immediate aftermath of Brexit and this was repeated during the, albeit, uncertainty surrounding Covid. While there is no doubt that government financial assistance has prompted a degree of support, there continues to be healthy demand for UK property, both domestically and from overseas.
The main challenge for 2022 will be the potential for further interest rate increases, as a means of controlling inflation. Will we see homeowners, now used to historically low mortgage rates, struggle as base rates tick higher?