House Price Growth Forecast to Slump to 0.2% Month-on-month

RICS paints a bullish picture on the outlook for UK housing, with the forward looking component of its just released survey revealing "near-term sales expectations improved to a ten month high".

However analysis from a top-ranked independent economic research provider paints a different picture regarding the outlook, saying house prices will struggle to remain in positive territory over coming months.

The January 2022 RICS UK Residential Survey revealed that "as it stands, respondents continue to expect widespread growth in both sales activity and house prices over the year to come."

Near-term sales expectations improved to a ten month high, with the latest net balance rising to +22% from +16% in both of the two previous reports.

In terms of the twelve month outlook, RICS says a headline net balance of +24% of survey participants envisage sales volume rising over the year to come, which makes for an increase on December's +16%.

"Looking at house prices, there seems to be no sign of the recent strong pace of growth losing much momentum," says RICS.

Chart: RICS.

They report a national net balance of +74% of survey participants seeing an increase during January.

Both three and twelve month price expectations remain firm, returning respective net balances of +36% and +76% (both of which are slightly stronger than the December 2021 returns).

Furthermore, all UK regions/countries are anticipated to see a further pick-up in house prices over the year ahead.

But Pantheon Macroeconomics is forecasting only modest rises in house prices in 2022 as real incomes take a hit from rising inflation and tax increases.

The independent research provider has form; their Chief UK forecaster Samuel Tombs was rated the top forecaster for the UK economy in 2021 by Reuters.

Pantheon says house price growth will slow this year, as demand cools amidst rising inflation and higher interest rates.

"For starters, higher mortgage rates will weigh on affordability; the two-year overnight index swap rate has soared to 1.60%, from 1.00% at the end of December, and from 0.26% in August," says Gabriella Dickens, Senior U.K. Economist at Pantheon Macroeconomics.

In the wake of last Thursday's Bank of England interest rate hike, Moneyfacts says fixed-rate mortgage deals priced below 1% have now disappeared from the market, down from a high of more than 130 mortgages in October last year.

The current cheapest two-year fixed rate now costs 1.39% and means a borrower will pay £800 more in interest per year compared with a 0.99% rate, on a £200K mortgage. The average two-year fix increased from 2.38% to 2.44% month-on-month.

"I can't imagine lenders will be introducing deals with rates that low again for a good while. If borrowers aren't on the best rate they can possibly get, they need to consider why. Because rates are only going to go up from here," Katie Brain of Defaqto told The Telegraph.

Indeed, RICS acknowledge that their most recent survey of the residential property market was largely conducted prior to the Bank of England’s decision to raise interest rates by a further 25 basis points on February 03.

And with further rate hikes almost certainly likely to be delivered the cost of borrowing is likely to rise further.

Pantheon Macroeconomics finds mortgage spreads to already be tight by past standards, saying the average quoted rate for a two-year fixed-rate mortgage, with a 75% LTV ratio, looking set to increase to about 2.00% in April, from 1.62% in January and the low of 1.20% seen in September.

But it is inflationary pressures that are likely to add significant headwinds to the housing market.

"House price growth has tended to struggle when CPI inflation - which we expect to jump to over 7% in April - is strong, due to the resulting hit to real incomes," says Dickens.

The Bank of England now forecasts UK headline inflation to peak at 7.25% year-on-year in the first half of 2022.

"The combination of high inflation and tax increases in April suggests that households' real disposable income is set to fall by around 1.8% this year, the most since 1977," says Dickens.

Accordingly, Pantheon Macroeconomics forecast house price growth to struggle in the coming months, with month-to-month gains averaging just 0.2% in the first half of this year.