Falls in the cost of debt and an improving economic outlook have created more capacity for house price growth
What’s changed?
The oft-quoted Winston Churchill once said, “Politics is the ability to foretell what is going to happen tomorrow, next week, next month and next year. And to have the ability afterwards to explain why it didn’t happen”.
Much the same could be said of the dark art of house price forecasting.
At the beginning of November last, we forecast that house prices would fall by an average of -3.0% in 2024 and that housing transactions would remain at around 1m for the year.
At that time, a 75% LTV mortgage from Nationwide on a two-year fix cost 5.34%. Mortgage approvals were down below 50,000 per month. One of the most reliable lead indicators of house price movements – the reading for new buyer enquiries in the RICS Housing Market Survey – was still in negative territory (with a net balance of 23% of respondents saying they were still falling in October).
Yet the average UK house price rose by a net figure of +1.1% in the first three months of the year, according to Nationwide (rising in two months and falling in one). That brought annual house price growth to 1.6% at the end of March.
Furthermore, monthly mortgage approvals in February rose above 60,000 for the first time since September 2022, and the RICS reading for new buyer enquiries moved back into positive territory.
This recovery has primarily been underpinned by an easing of mortgage rates. A highly competitive mortgage market meant lenders have fairly aggressively priced in the prospect of cuts in bank base rates. As a result, while the bank base rate remains at 5.25%, the cost of the same two-year fixed-rate Nationwide mortgage now stands at 4.84%, while a five-year fix carries an interest rate of 4.50%.
Not only are fixed-rate mortgage costs lower than we anticipated at this stage, but they have also been much less volatile. And this, combined with a slightly improved outlook for economic growth, has given buyers more confidence.
And what hasn’t?
However, we aren’t getting carried away.
Ongoing uncertainty around the pace of future base rate cuts, a relatively weak (though improved) outlook for economic growth in 2024 and the potential for a general election to pause the recovery means our expectation for prices this year has gone from low single-digit house price falls to low single-digit increases.
And over the medium term, our forecasts have changed very little, with the same longer-term affordability considerations applying.
More detailed thinking on headwinds and tailwinds
We are increasingly confident that house price growth will be in positive territory at the end of 2024, but we expect price rises this year to be contained to 2.5%.
This reflects the fact that forward indicators from the RICS survey have become more positive over the last six months. The net balance of opinion for new buyer enquiries has shifted from -23 in October 2023 (falling activity) to +8 in March 2024 (increasing activity). Surveyors’ price expectations have followed that trend. But they still remain relatively cautious.
In part, this is because those same surveyors have also shown increasing numbers of new properties coming to the market. With a greater balance of surveyors seeing new instructions rise than new buyer enquiries increase, unsold stock levels have ticked up.
Furthermore, the level of price cutting before properties are sold suggests a continued imbalance in the market between sellers’ expectations and what buyers are in a position to pay. Notably, the number of price changes in March 2024 was 42% higher than the pre-pandemic norm, according to TwentyCi.
That means the market remains exposed to any pick-up in headwinds. And there are still some that have the potential to dampen the scale of any market recovery.
At the end of March, the headline rate of inflation (CPI) had fallen to 3.2% from its October 2022 peak of 11.1%. But the return to normality has been a protracted process. And with wage growth still standing at 5.6%, the number of base rate cuts this year remains uncertain, with mixed signals emanating from the Bank of England.
Accordingly, swap rates – market pricing of debt over the medium term – remain volatile. Whilst the financial markets were pricing in the first base rate cuts to come in March 2024 at the start of the year, these swap rates have since risen again, responding to the continued uncertainty in the Middle East, and higher-than-expected US inflation data.
Consequently, there is little prospect of a further meaningful fall in mortgage rates this year, with a risk that instead they could rise a little.
And then there is the political element.
While Winston Churchill gave us the perfect introduction to this report, we have turned to a quote from Thomas Sowell, the American economist, social philosopher and political commentator, as our next source of inspiration. “Economists are often asked to predict what the economy is going to do. But economic predictions require predicting what politicians are going to do – and nothing is more unpredictable.”
It is possible, therefore, that the upcoming general election could temporarily affect the housing market. With the odds firmly on an election towards the back end of the year, there is a risk that this will temper demand and activity in the autumn. However, polling suggests most buyers and sellers will have already factored in the prospect of change in government.
In the round, we don’t anticipate that the rate of price growth and pick-up in activity seen in the early part of 2024 will carry through the whole year. Instead, we expect the market to continue to be somewhat stop-start until the Bank of England is able to definitively signal the end of the battle to control inflation through a cut to the base rate.
Looking to the longer term
The economic fundamentals that we expect to govern the market in the medium term have slightly improved. Oxford Economics forecast for GDP growth over the next five years has increased from 7.2% to 8.9%, and wage growth from 15.8% to 16.4%. These factors, along with steady cuts to the base rate that are forecast to begin in the second half of 2024, will combine to produce a progressive restoration of buying power, opening up more capacity for house price growth.
Our five-year UK forecast has therefore been nudged up from 17.9% to 21.6%. The distribution of growth is also now expected to be slightly more even over the five-year period. A strong economic performance in 2025 and 2026 will support buyer sentiment. But without the previously expected falls at the start of our forecast period, affordability constraints will become a factor earlier than we had previously anticipated, particularly in the already stretched markets of London and the South East.