A number of factors throughout 2021 meant that the housing market had a record year. The Covid-19 pandemic meant that a considerable proportion of the population was working from home and, as a result, reassessing whether their space was fit for purpose. The government also introduced a temporary stamp duty holiday to stimulate the housing market and incentives like the furlough scheme and reduced VAT for hospitality businesses to encourage economic growth. Interest rates also remained low, with no rise in rates imposed by the Bank of England from the start of the Covid-19 pandemic until December 2021. All of these factors mean that demand in the UK housing market far outstripped supply, leading to a 10% increase in house prices in just 12 months. Predictions for 2022 show that this trend is set to continue, but whilst prices will remain high, growth looks set to slow as the market returns to a more sustainable level of growth.
Since the start of the Covid-19 pandemic in 2020, the housing market has enjoyed a significant boom. The property market and construction industry was forced to close during the first lockdown in early 2020, meaning that by the time it reopened in the middle of the year, demand had built up significantly. This demand was fuelled further by a labour force who were now spending the majority of their time working remotely, and quickly realising they needed more space to accommodate a home office, home-schooling and leisure time spent indoors.
City and rural
Cities experienced a mass exodus, with more rural areas and the countryside becoming prime locations for people looking to relocate. Buyers were willing to spend a lot more on properties with extra bedrooms, gardens and multi-use spaces, pushing the price of these kinds of dwellings up even further. In September 2021, the average house price in the UK reached £270,000, up £28,000 on the previous year.
The continued closure of huge parts of the hospitality, sports, nightlife and entertainment industries also meant that household savings were at their highest since records began in 1987. People had no choice but to stay in, meaning money spent on eating out, cultural events and socialising decreased substantially. More people were able to save up for a house deposit, evidenced by the huge numbers of mortgages that were approved throughout 2021.
On top of these lifestyle changes, was the incentive of the government’s stamp duty holiday. This 14-month tax break had the desired effect on the housing market. People scrambled to close on house sales before the holiday ended in September 2021, and those who otherwise may not have been able to afford to move were suddenly able to consider a new home.
This combination of lifestyle factors and economic stimulation meant that house prices grew at their fastest rate since 2007 throughout 2021. However, this level of growth is rarely sustainable, and market indicators and expert predictions for the coming year signal that the housing market is set to slow down during 2022. Firstly, the stamp duty holiday has now ended so demand will no longer be stimulated by the reduced cost of moving home. Indeed, we are already starting to see evidence of the housing market cooling off, with a reduction of 30% in the amount of house sales completed in October 2021 compared with October 2020.
Record levels of inflation have also been reported across the national news recently. The cost of living is set to rise thanks in part to a combination of the energy crisis, supply issues and a shortage of certain goods. This may cause consumer confidence to drop, meaning the general public are more likely to stay where they are rather than spend substantial amounts of money on moving. High inflation also makes saving more difficult, with fewer people able to afford to save for a house deposit.
In order to control spiralling rates of inflation, one strategy the government may choose to implement is to increase interest rates further. This is another economic factor which would affect the housing market as mortgage repayments would become higher, putting prospective buyers off moving or making a mortgage unattainable for those who do wish to move. If not done carefully then, any sudden increases to interest rates could cause the housing bubble to burst and house prices to tumble.
Although we are already seeing evidence that the housing market’s growth is slowing down, the outlook for house prices in the coming year and beyond is still positive. The market remains extremely robust, with prices remaining high going into 2022. Whilst we may not see the exceptional rates of growth experienced during the extraordinary conditions of 2021, people are continuing to work from home and there is a reduced need for city centre housing. This, alongside permanent lifestyle shifts, and the continued reassessment of living spaces brought about by the pandemic, means that house prices look set to remain high in 2022.
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