By Tom Bill, head of UK residential research at Knight Frank
The combination of the Christmas break and an Omicron surge has been disorientating. Here are four things to consider for the UK property market as the confusion begins to lift.
If there had been no Omicron variant, we could predict with a high degree of confidence that supply in the UK property market would rise in early 2022. Sellers have been stirring in recent months as the frenetic conditions of the stamp duty holiday become a distant memory. The arrival of Omicron doesn’t mean they will now retreat, but the assumption that listings will increase is slightly less assured. Supply is one of four useful measures to assess the trajectory of the UK property market this year, as we set out below.
Gravity-defying price growth
In relation to this first benchmark, sellers were undoubtedly becoming more active before Christmas. The number of UK sales instructions in November and December rose by 7% versus the average between 2015 and 2019, Knight Frank data shows. Market valuation appraisals, a leading indicator of supply, was 10% higher. It appeared that exceptionally strong levels of demand would be more evenly matched by supply in the early months of 2022, putting downwards pressure on the gravity-defying price growth we have seen in recent months, Does that still appear likely? The trajectory of Omicron is uncertain and we may become more closely acquainted with the tail end of the Greek alphabet if new variants emerge, but with each piece of encouraging data about the ability of hospitals to cope with the current wave the answer feels more like a ‘yes’. Indeed, the path of the pandemic is the second thing to watch this year – perhaps more closely than anything else.
The impact of Covid-19 on the UK housing market has become primarily a question of sentiment, as the anti-climactic end of the furlough scheme showed. Buyers and sellers need the confidence to plan without the prospect of an abrupt change of direction and that sense of certainty could begin to materialise in coming weeks. If it happens, it will initially benefit those who can act quickly – we have previously explored the benefits of listing in January. For buyers and sellers who are more discretionary, spring is likely to remain the focus. Whatever the timing, the strength of demand remains unwavering for now. The number of new prospective buyers in the UK in the final two months of 2021 was 63% higher than the average between 2015 and 2019. However, the third key thing to consider in 2022 is borrowing costs, which may cause demand to start fraying around the edges later this year. Normalising interest rates are a sign the economy is getting stronger but as mortgage rates also normalise, this will inevitably dampen demand and price growth. However, it should be remembered that the current base rate of 0.25% is below the level of 0.75% in March 2020, which was still considered historically low at the time.
A dab on the brakes
While rates are heading in one direction, they are unlikely to rise precipitously, meaning the short-term effect will be more like a dab on the brakes. However, what is different between now and early 2020 is inflation, which some economists expect to reach 7% this year. As the cost of living increases, this will further curb demand and house prices and will increase pressure on the Bank of England to raise rates more quickly if inflationary pressures start feeling less transitory. In a sign of what financial markets expect to happen to borrowing costs, the five-year swap rate last week was the highest it has been since November 2018. The final issue that will have an impact on the UK residential property market this year, particularly in prime areas of London and the Home Counties, is the return of international travel. Heathrow passenger numbers in November were 51% down on the same month in 2019, although that compares to an equivalent drop of 90% in May.
Numbers are gradually picking up and the government has recently relaxed rules around testing for international travel and ended what became an increasingly futile ban on arrivals from countries including South Africa in the wake of the Omicron variant. Both of these measures have been welcome by the travel industry but, as we have explored before, the relaxation of travel rules in the UK hasn’t yet meant business as normal for overseas property buyers. Seasonality and the erratic path to recovery in different parts of the world will continue to have an impact and could mean international demand only recovers more noticeably in the second quarter of this year, barring any unforeseen variant news. In summary, provided we don’t veer too far from the current trajectory on all four of these measures, the UK property market should, somewhat counter-intuitively for the second year running, have a strong 12 months.