In the firm’s UK housing market outlook, Andrew Wishart, property economist at Capital Economics, said the “extension to the stamp duty holiday has given house prices renewed impetus”.
The most recent index from Halifax showed prices rose 9.5 per cent annually in May, while Nationwide suggested inflation had reached 10.9 per cent – already hitting double figure growth.
“High sales volumes and limited stock suggest that house price inflation could reach 20 per cent, but a drop in sales after the stamp duty holiday should ease the upward pressure,” Wishart added.
Home mover demand replaced by FTBs
The report estimated 160,000 existing homeowners moved in Q1, double normal volumes seen over the past decade.
This is set to slow along with the stamp duty holiday end, judging by a drop in sales instructions in May. This suggests there will be a reduction in home mover demand going forward.
Capital Economics also suggested that although mortgage lending was at the highest level since 2007, it was also demand from cash buyers driving house purchase activity. The report said annual house price growth looking at both mortgaged buyers and cash buyers showed a stronger performance than looking at just those purchasing with loans.
However, once incentives for movers and cash buyers are removed first-time buyers will continue to transact, due to improved high loan to value (LTV) mortgage availability. This will bolster the supply-demand imbalance and further push up house prices in the near-term.
The report also predicted stock would remain “very limited relative to demand,” resulting in continued competition for available properties.
Wishart added: “That imbalance between supply and demand means that estate agents now have just five months of stock on the books at the current rate of sales, the lowest since 2002.
“While the market is tighter than usual in all regions there is considerably more stock available in London than elsewhere, reflecting both how the pandemic has affected location preferences and already stretched affordability in the capital.”
Stamp duty taper and end
The analysis referenced the recent Royal Institute of Chartered Surveyors (RICS) index where respondents said they did not expect sales to drop in the next three months despite the stamp duty taper. However, the market is expected to slow over the next year.
Wishart said the tapering on 1st July would affect demand for properties in London and larger homes, due to the lack of savings from the tax break.
Outside of London and the South East where savings can still be made, agreed sales will continue to be “resilient,” the report suggested.
Three-year interest rate hold
The economic outlook is better than initially predicted, the report said, with GDP just 3.7 per cent below pre-pandemic levels and unemployment set to rise by 5.5 per cent, instead of the predicted eight per cent.
Wishart said inflation could rise above the Bank of England’s two per cent target to 2.9 per cent, following a 2.1 per cent growth in May.
“However, so long as above-target inflation is temporary, we think that the Bank of England will keep interest rates on hold for the next three years,” he added.