UK house price growth to slow thanks to rising cost of living

House price growth will soon slow down to single digits as costs ramp up for consumers, Knight Frank has predicted.

Annual house price growth reached 11% in March, according to Halifax’s house price index, but the real estate consultancy reckons it will come down to 5% by the end of 2022.

Tom Bill, Head of UK Residential Research at Knight Frank, said: “First, mortgage rates will continue to rise alongside interest rates. The Ukraine conflict may slow the pace of this normalisation, but the Bank of England will be under pressure to respond to inflationary pressures in the short-term and the UK’s economic recovery in the longer-term.

“Crucially, we believe supply will continue to increase as the distortive effects of the pandemic fade. The supply shortage has been the single biggest cause of strong house price growth and early signs this spring suggest stock levels are building.

“Meanwhile, the ‘race for space’ will calm down without disappearing altogether. For many people, the post-Covid work-life balance is far from set in stone and demand will still be fuelled by a desire to improve living arrangements after successive lockdowns, in many cases enabled by the accumulation of household wealth and the fact many sectors of the economy have performed well during the pandemic.

“However, we believe the cost-of-living squeeze will bite harder in 2023, and we expect house prices to climb by 1% before starting to slowly pick up again.”

In the long run, Bill predicts 13.6% of cumulative house price growth in the five years to 2026.

He reckons The Midlands will be a strong performer due to the growth of the logistics sector and social sciences.

Prime Central London should see growth of 3.5% in 2022, followed by 6% in 2023, as it continues to recover from six years of political uncertainty and a changing tax landscape.

Next year overseas demand should continue to return, pushing up prices further.

Prime outer London will continue to benefit from the ‘race for space’ this year, which is likely to tail off from 2023, producing 15.9% growth over the five-year period.

It is a similar story in prime country markets, where prices are forecast to grow 17% over five years.

UK rental market forecast

The cost of renting should rise by 17.1% in the next five years, including an increase of 4% in 2022.

The landlords that left the sector due to tax and regulatory changes are creating a shortage of rental homes relative to demand.

Oliver Knight, head of residential development research at Knight Frank, said: “At a national level, the rental market is being shaped by a deepening supply and demand imbalance.

“The number of properties available to rent during Q1 2022 was more than a third lower than the five-year average pre-pandemic. At the same time, demand from tenants has continued to rise. The RICS residential survey reported that tenant demand rose to its highest level since 1999 in January, while new landlord instructions remained in decline.

“In part, the supply shortfall reflects the fact some landlords have left the sector because of tax and regulatory changes in the last few years, a trend we don’t expect to reverse.

“We forecast a shortage of rental homes relative to demand will be a key factor underpinning rental growth in all regions in 2022, notwithstanding the fact that short-term inflationary pressures will, inevitably, act as a brake on larger rises as household finances are stretched. Current forecasts from Oxford Economics suggest inflation will end 2022 at 7%, though cumulatively inflation is only expected to increase by 13.7% between 2022-26.”

He added that in later years supply will remain tight, but earnings growth should act as a main driver behind rents, resuming a long-term relationship and supported by a robust outlook for the employment market.

Rents are likely to see the strongest growth in affordable areas like the North and the Midlands.

In Prime London the rental market should go from strength to strength, with rents rising by 8% this year.

However next year they should normalise, as Knight Frank predicted increases below 4% in Prime Central London from 2023.

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