A demand rollercoaster
Since its summer peak, demand for housing has weakened and has now fallen below pre-lockdown levels. Despite this dip, it remains 34% higher than this time last year. Demand recorded a sharp dip after the announcement of the latest national restrictions in England but it rebounded once the lockdown began.
Demand levels are set to hold firm for the remainder of the year, and the monthly sales completions estimate suggests the strongest December – and the run-up to Christmas – for over a decade. We then anticipate a further demand spike in January 2021, as some buyers leave it late to enter the market in an attempt to beat the stamp duty deadline.
An unexpected year
Many anticipated that 2020 would be a bumper year for the property market as activity ramped up in the wake of the General Election. While Covid-19 precluded that in the second quarter, the scale of the rebound has resulted in a remarkable turnaround, with completed sales expected to fall just 6% short of the levels seen in 2019.
Meanwhile, sustained demand and more available supply have boosted the volume of new sales agreed, which are running 38% higher than a year ago, adding to the sizable pipeline of business that is set to complete in the first quarter of 2021. Of the new sales that are agreed in January, just half are likely to beat the stamp duty deadline based on evidence from previous years.
The boost to demand and sales volumes has culminated in house price growth approaching an almost three-year high of 3.5%, up from 1.2% a year ago, with 2020 expected to end with house price inflation reaching 4%. The scale of growth is explained in part by a shift in the mix of homes transacting, with more sales in wealthier demographics at higher prices.
The outlook for 2021
Next year is shaping up to be a year of distinct phases. With the first quarter set to register a seasonal uplift in demand, we expect this to be short-lived and for demand to weaken thereafter.
Once the stamp duty holiday concludes at the end of March, we anticipate a slowdown in sales completions as the impetus to move amongst buyers motivated by stamp duty savings dissipates.
This will have a knock-on effect on transaction volumes in the second quarter of the year, which we expect to run 20-30% below normal transaction levels as stamp duty is reintroduced, before recovering slightly and running 10% below 2019 levels for the second half of the year.
The influence of weakened demand in the wake of stamp duty is reflected in our house price inflation forecast for 2021, which we project to end the year at 1%, down from 4% growth at the end of 2020, as weaker market sentiment and economic uncertainty reduce the upward pressure on prices.
We expect house price growth in 2021 to fall within a narrow range at a country and regional level, from 1.75% in Scotland to 0.5% in the East of England and the North East.
Central to our outlook is lower levels of turnover by long-run standards, which over time increases the scarcity of homes for sale. We expect the supply of properties for sale to moderate over 2021, which will restrict choice for consumers.
This creates a scenario in which any improvement to the economic climate, growth in employment levels, or an uptick in consumer sentiment will in turn boost demand, increase transaction volumes in line 2019 levels, and could provide the impetus for house price growth in 2022.
A resilient market
The housing market of 2020 has proved more resilient than many first anticipated. As the pandemic took hold and the market closed in the second quarter of 2020, an impending market downturn was forecast, which hasn’t materialised, and which we don’t expect for 2021 either.
The scale of any downside for house prices and turnover in 2021 is lower than in previous downturns due to two factors; firstly, there is low market liquidity compounded by a decline in sales volumes over the last five years in many regions. Secondly, there is a lack of any excess over-valuation of housing.
Annual housing transactions have been stuck at around 1.1 to 1.2 million for the last six years, and figures show a gradual contraction in the volume of annual moves in the UK since 2015, limiting how much further activity levels could fall. The 2008/09 recession recorded just under 900,000 sales per year, meaning we’re not far off this baseline already. Reduced market liquidity also creates scarcity, which supports pricing, although it also makes for greater price volatility.
History shows that house price falls tend to be exacerbated when following periods of high and unsustainable house price inflation in the two-three years before the market turns. Mortgage regulation and tax changes have limited the use of greater borrowing to bid up the cost of housing.
Furthermore, price growth slowed in recent years with prices falling in London and southern England over 2018-19.
Richard Donnell, Director of Research & Insight, Zoopla, comments: “It has been a roller coaster year for the housing market which is ending on a strong note with demand and sales agreed still more than 30% higher than this time last year. House price growth has hit a three-year high and is set to increase further in the short term.
“The high volume of sales agreed this autumn will spill over as completed sales in 2021 and this will support the overall number of sales completed in 2021 at 1.1 million. It has been a remarkable turnaround and completed sales look set to fall just 6% short of last year despite a two-month closure of the market in England.
“There are some challenges ahead as the country battles the impacts of the pandemic on the economy and day to day life. The impact on the housing market is less than in previous downturns as sales volumes have already fallen in recent years and affordability levels are far from over-stretched. We expect housing demand to slow further over 2021 and this will ease the upward pressure on prices which we expect to be 1% higher by December 2021. Lower sales volumes over the second half of 2021 and a growing scarcity of supply will offset weaker demand and support headline pricing levels.”
