The year 2021 was a banner year for many things, including the housing market in the United Kingdom. The most recent Halifax data, released this morning, as well as those released by Nationwide last week, reveal essentially the same thing. House prices in the United Kingdom have risen at some of the quickest rates since the financial crisis of 2008. For both unhappy first-time buyers and eager landlords, the question now is: what will happen this year?
Why was 2021 such an extraordinary year for UK property prices?
According to Halifax, house prices in the UK increased by 9.8% in the year to December, reaching a new high of just over £275,000 on average. Nationwide came up with a similar number, with an increase of 10.4% to roughly £255,000 on average. That appears to be the most significant increase in any calendar year since 2006. And, as Nationwide points out, this means that property values were 16 percent higher in 2021 than they were at the outset of the pandemic. We’re no longer astonished that a global pandemic boosted property prices in the United Kingdom including for the houses for sale in Cheltenham, but let’s review what caused the increases. First and foremost low interest rates and low borrowing costs enhance housing values. The epidemic had a negative impact on the economy. However, it resulted in more money printing and rate cuts, as well as increased government spending.
House prices couldn’t help but rise with interest rates at all-time lows. Despite the slightest of rate hikes at the close of last year, momentum remained robust, and bank rivalry for business rose. As a result, getting a home loan is still simple, and it may get even easier for the time being as lenders, unable to drop rates much further, get inventive with terms. Another key element is that during the pandemic, transactions increased dramatically. Property sales have recovered to levels not seen since the financial crises’ peak years.
Finally, one of the major concerns – that the termination of furlough would result in a large increase in unemployment – has not materialised. Oh, and the stamp duty holiday may have changed some deals around, but it hasn’t done much overall.
What is the prediction for 2022?
The increase in prices last year was primarily due to the rest of the UK catching up to London, rather than the capital becoming even more ridiculously pricey. Prices in London increased by 4.2 percent, compared to 15.8 percent in Wales, for example.
What’s the benefit of that? So, if the positive parts of cities continue to operate in a hybrid working environment, it’s great that young people may have a chance to live there. It’s also healthier to spread housing “wealth” across the country because homeowners who see their local towns or suburbs’ values rise will feel the disparity between rural and city dwellers less acutely.
Overall, though, this is not a positive trend. House prices are outpacing salaries at an alarming rate, which is terrible news for the economy. High housing prices make it difficult to do activities that are vital economically and socially, such as mobility and family formation.
In a perfect world, houses would gradually become more affordable. Wages would rise faster than prices, causing prices to decline in “real” terms and property to become more affordable without destroying anyone’s personal finances, which would be bad news for banks as well.
Higher interest rates and rising inflation, for example, can have a negative impact on stock values in general. Rising interest rates put pressure on indebted corporations, while rising inflation may encourage investors to demand greater value (and so make them less inclined to pay high price/earnings multiples for stocks).
It’s a little more difficult to interpret property. Rising interest rates may raise the cost of credit, reducing the amount of money available to spend on homes and, as a result, driving down prices. Inflation, on the other hand, is a more difficult subject to answer. If inflation raises interest rates and credit costs, the overall effect is the same. However, this isn’t always the case. Inflation is already far higher than interest rates, and it hasn’t made much of a difference so far, partly because people (perhaps correctly) believe that central banks will keep rates low in order to keep their countries from going bankrupt.
Meanwhile, the property is generally seen as inflation-protected by investors, particularly if purchased with cash or low-cost long-term loans. On the other hand, despite increased wage pressure, there is a distinct possibility that real incomes will be squeezed this year. Energy prices have already risen dramatically, and this trend will continue next year when a) people move off fixed rates and b) the energy price cap rises in April. There are also the upcoming tax hikes in April.
It’s difficult to see how these two things alone won’t eat away the average pay increase unless earnings skyrocket in the coming months. House prices in the UK are expected to rise by double digits again this year, but we suspect they will decline in nominal terms because it would necessitate much higher interest rates.