UK house price growth will slow this year, and is likely to produce just single digit growth according to the latest forecasts from Knight Frank.
The estate and lettings agency is predicting annual growth of 5% in 2022, with just a 1% growth the year after. It said higher mortgage rates, the cost of living squeeze, and increased supply will all act as a drag on runaway house prices.
But while it is forecasting a general market cool down, Knight Frank predicts that prices in prime central London will buck this trend, and should pick up as global travel resumes after the Covid pandemic.
Knight Frank is also more upbeat about prospects in the buy-to-let sector, with UK rents forecast to increase by 4% in 2022, building on the strong performance in the second half of last year.
Longer-term, it predicts that supply constraints, strong tenant demand and robust earnings growth in will support an increase of 17.1% in rental values over the next five years.
Looking at the residential market Knight Frank head of UK residential research Tom Bill says: “The UK property market has defied gravity over the course of the pandemic. Tight supply, low interest rates, accumulated household wealth and a desire for more space and greenery have conspired to produce double-digit house price growth over the last year.
“We believe that 2022 is when this begins to unwind, and growth returns to single digits.”
He says several factors will contribute to a slower growth in house prices.“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. 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.”
Bill says that in the five years to 2026, Knight Franks is predicting that this will produce 13.6% cumulative growth in the UK. It says there will be regional differences, with the Midlands for example, expected to outperform as it benefits from the UK’s changing economy after Covid, and the growth of the logistics sector and life sciences.
He adds: “In prime central London, we forecast 3.5% growth this year as the property market inside zone 1 continues its overdue recovery after six years of political uncertainty and the emergence of a more adverse tax landscape.
“We forecast that growth will be 6% in 2023 as the return of international buyers gathers pace. That is later than we previously anticipated and reflects how there is unlikely to be a single moment when overseas demand normalises. Instead, the process will be more gradual and erratic as different countries deal with Covid-19 in different ways. We forecast 22.2% growth in PCL over the period.”
Upbeat forecast for BTL landlords
Knight Frank, head of residential developmental research Oliver Knight says that 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.”
He adds: “In later years, supply will remain tight, but we are forecasting that earnings growth will act as the main driver behind rents, resuming a long-term relationship and supported by a robust outlook for the employment market. There is scope for stronger rental growth in areas of the country where rents are relatively more affordable, particularly in the North and Midlands.”
He added that the prospect of further regulatory reforms towards the end of our forecast period, largely around minimum energy efficiency standards, have the potential to limit supply from mortgaged landlords further.
