2021 Was a Record Year for the Housing Market – What Can We Expect in 2022?

2021 has been a record year for property sales, with figures set to exceed the highs that were seen in 2007, and over £473bn of new sales agreed – £95bn higher than 2020. Now, 2022 is just around the corner and the impact of the pandemic on sales activity has further to run, albeit at a less frantic pace.

So, what can we expect from the property market in 2022?

Record year of sales and prices – no cliff edge

We can all agree that the housing market has outperformed everyone’s forecasts from a year ago. It is set to be the strongest year for sales and house price inflation since 2007, with £473bn of new sales agreed in 2021, £95bn higher than 2020. These figures are a result of the ongoing national re-evaluation of housing, low mortgage rates and the additional boost from the extended stamp duty holiday.

The strength of the market conditions is not because of the stamp duty holiday alone, there are greater forces that are shaping the market.

This has been evidenced by the fact that there has been no sign of any cliff edge in demand for homes which continues to operate 25-30% higher than the 5-year average since the summer. Demand is anticipated to end more strongly than last year at the end of 2021, and this is expected to carry into 2022.

UK house price growth is currently running at 6.6%, with all countries and regions of the UK registering growth rates drastically higher than the 5-year annual average – see graph below.

Clear evidence of a slowdown in rate of price inflation

 Demand for properties have not been uniform over the last 18 months. Analysis conducted by Zoopla has shown that a mix of home buyers and pricing of properties sold have shifted significantly during this period. According to the statistics, the mix of buyers are starting to return to normal as the economy re-opens and mortgage availability improves. However, there is clear evidence that shows slower growth in the value of properties where new sales have been agreed. This marks a turning point for house price growth, as the rate of price inflation is likely to balance in Q4 and through into 2022.

Current momentum to outweigh emerging headwinds

Looking ahead into 2022, the outlook for price inflation and overall sales volumes is a balance between positive and negative influences.

On the positive side, property remains affordable in many markets and competition amongst lenders will remain intense, even if mortgage rates increase. There is continued scarcity of homes for sale, and this will remain well into 2022, supporting a further price inflation.

In addition, research has shown that the impacts of the pandemic on home buying decisions will continue into 2022. This will be supported by the scale of financial gains homeowners have seen in the value of their properties since 2020, which will bring sellers into the market.

The main headwinds will come from the increases in the cost of living, higher levels of inflation and tax increases in 2023. A moderate rise in mortgage rates is likely to occur in 2022 and will impact household buying power. The main market related challenges stem from unrealistic expectations on pricing on the part of new sellers and a lack of homes putting off new entrants, both of which are lower risks in 2022.

Further room for growth in most affordable markets

The affordability of housing is important but there is no guarantee of activity and rising prices. In many parts of the UK housing remains affordable by historic standards.

There is headroom for further, above average house price inflation in regions outside southern England. However, while affordability levels have improved by 10% in London since 2016, affordability remains well above average – this will continue to limit the level of prices in the highest value areas of London and southern England in 2022 and beyond.

Pandemic impact on market has further to run

It is now clear that the impact of a global pandemic on the UK property market was not going to be short lived. The impact of the pandemic has further run into 2022, supporting market activity and sales volumes. The primary catalysts will be an ongoing re-evaluation of housing needs, increased housing equity and moves in parts of the labour force to more hybrid working.

Research conducted by Zoopla found that 22% of UK households remain ‘eager’ or ‘very eager’ to move home in the next 18 months as a direct result of the pandemic. It is important to not overstate the impact of the pandemic, however. The same research found that 60% of respondents had no change at all in their motivations to move which is not surprising.

The survey also revealed a clear split in the desire to move between younger households and growing families and older, more established households who are settled in their current home. In addition, those eager to move tend to be in city, suburban and large towns and those who expect changes in their working patterns.

The primary motivation of those eager to move was their current home not being suited to their requirements (46%). This was followed by personal motivations e.g., to be nearer to friends and family (28%) and finally expectations of changes in working patterns (18%).

 With full-scale national lockdowns seemingly behind us, the shift to more hybrid working for many office workers is likely to be a key catalyst of housing decisions and choices as we move into 2022.

After a record year for sales in 2021, it is expected that housing transactions will decline by 20% to 1.2m in 2022. This is in line with the long run average but still relatively high compared to sales volumes over the last decade.

Higher mortgage rates impact buying power and activity more than prices

Low mortgage rates have become an important feature of the property market over the last decade and a support for higher house prices. Home buyers have become used to the low mortgage rates which have ranged between 2% and 3% since 2015, hitting a low of 2.1% in Q2 2020.

It is important to note, however, that the regulation of mortgage lending from 2014 onwards has stopped lower borrowing costs from creating an unsustainable boom in house prices. The market is better insulated from higher mortgage rates than in the past but not immune.

The consensus among economists is that interest rates will increase over the coming year as central banks scale back on support for the economy and look to normalize interest rates and manage inflation.

Projections assume that mortgage rates will reach 3% by the end of 2022 – the highest level since 2015 but still low by historical standards.

There are two aspects to consider with higher mortgage rates – first, how they impact new buyer demand and second, the impact on the existing 11m mortgaged home owners.

Any increase in borrowing costs will impact the buying power of new purchasers but all this depends upon how much rates increase. Analysis conducted by Zoopla suggests that an increase in mortgage rates to 3% will not have a major impact on the price buyers could pay for homes but any increase in rates could deter some would-be buyers and impact sales.

Existing borrowers have more protection from higher mortgage rates. Over 80% of outstanding mortgages are on fixed rated rates, many for 5 years or more. Furthermore, all new borrowers since 2014 have had to prove to the lender that they can afford a mortgage rate of up to 7% which provides additional resilience for existing borrowers.

Strongest price growth in regional market in 2022

Nationally, we expect average house prices to increase by 3%, down from an annual growth rate of 6% at the end of 2021. The upward momentum in prices over 2020 and 2021 has been created by the initial impact of the pandemic and artificial stamp duty holiday deadlines over 2021 – factors that will not repeat themselves in 2022. Together with the expectation of a modest increase in mortgage rates, it is believed that the net result will be a moderation in the rate of growth to more substantial levels.

Any national average will always have a variation at sector and geographical level. Today, house prices are rising by 10% per annum in northern towns such as Blackburn and Rochdale while price growth remains marginally negative in most central London boroughs. The growth rate between flats and houses has widened over 2021 and it is expected that the rate of price inflation for flats to remain weaker over 2022 as buyers continue to prioritise space.

At a regional and country level, it is anticipated that house prices to continue to increase at an above average rate in regional housing markets over 2022, albeit at a slower pace than currently. The fastest growing markets are expected to be the North West (4%) and Wales (4%) with below average growth of 2% in London where affordability factors will limit growth in the near term.

We hope that this blog was insightful – if you would like more up to date news then head over to our social medias, just search for Boxall Brown & Jones.

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