The housing market has so far seen a V shaped recovery. House purchase mortgage approvals have already recovered to their pre-virus level, while house prices have reversed the dip recorded earlier in the year. But as pent-up demand is expended and the stamp duty cut expires, the market is likely to lose momentum. We expect house price growth to stall in 2021, while mortgage approvals fall below their pre-virus level.
- The housing market has so far seen a V shaped recovery. House purchase mortgage approvals have already recovered to their pre-virus level, while house prices have reversed the dip recorded earlier in the year. But as pent-up demand is expended and the stamp duty cut expires, the market is likely to lose momentum. We expect house price growth to stall in 2021, while mortgage approvals fall below their pre-virus level.
- Economic indicators point to a continued recovery in GDP from its lockdown low. Meanwhile, the effects of the pandemic on unemployment are not yet evident in the labour market data, although that is likely to change in the coming months as the furlough scheme ends.
- Market conditions and search activity were buoyed by the stamp duty cut and release of pent-up demand in August, with the RICS data showing a surge in both active demand and supply. At the same time, the rise in high-LTV interest rates suggests that lenders continue to be cautious.
- Mortgage approvals and transactions have been unexpectedly quick to recover from their lockdown low. Indeed, house purchase lending has already returned to its pre-virus level, and leading indicators point to a further rise in the coming months. But the surge in activity mostly reflects pent-up demand and a temporary stamp duty cut, both of which won’t last beyond the first quarter of 2021.
- House prices have bounced back strongly across July and August, while the picture for rental values is more subdued. (See Chart 1.) Of all the regions, London seems to be performing the worst in terms of house prices. This probably reflects the shift towards working from home, which is moving housing demand away from city centres and out towards the suburbs. (See our Focus)
Chart 1: House Prices (% m/m)
Sources: Nationwide, Halifax
- GDP rose by a hefty 6.6% m/m in July, but further gains in economic activity are set to be smaller (2). Indeed, our CE Business Impact of Coronavirus Survey Indicator, which is based on an ONS survey of firms’ revenues, suggests that August’s GDP rise will be more modest (3). Furthermore, the risk is that rising virus cases will pose fresh headwinds for the recovery (4).
- The fallout from the pandemic is not yet evident in the labour market data. ILO unemployment rose to just 4.1% in July – still low by past standards (5). Indeed, it seems that the bulk of the 3 million or so workers that have left the furlough scheme have gone back to their jobs rather than into unemployment or inactivity (6). But with workers kept on the scheme for the longest also the most likely to lose their jobs, we expect the unemployment rate to rise further in the coming months.
- Inflation saw a broad-based decline in August, to just 0.2% y/y (7). Part of this fall is likely to be reversed in the coming months, but a weak economy means CPI may stay below target for some time.
Chart 2: Level of GDP (February 2020 = 100)
Chart 3: Capital Economics BICS Indicator & GDP
Chart 4: Number of New Virus Cases
Chart 5: ILO Unemployment Rate (%)
Chart 6: No. of People on Furlough Scheme (Millions)
Chart 7: CPI Inflation (%)
Sources: ONS, HMRC, Refinitiv, Capital Economics
Housing Market Data and the Home Buying Process
Steps in the process
Unsold property per surveyor (No.)
New properties for sale (% bal)
New buyer interest (% bal)
Site visits (new housing, % bal)
Asking prices (% y/y)
Use of sales incentives (% bal)
Agreed sales prices (% bal)
New homes prices (% bal)
Net reservations of new homes (% bal)
Agreed sales (% bal)
Price expectations – next 3m (% bal)
Sales expectations – next 3m (% bal)
Mortgage approvals (000s)
House prices (% m/m)
Completed sales per surveyor
House prices (% m/m)
UK House Price Index
House prices (% m/m)
House prices (% y/y)
Property transactions (000s)
Source: Capital Economics
- Measures of buyer and seller activity were very strong in August. Indeed, both the RICS new buyer enquiries and new sales instructions balances recorded some of their strongest results on record. Newly agreed sales also rose strongly during the month – indicating a strengthening pipeline of in-progress transactions. Meanwhile, data from housebuilders show rising housing demand and sales.
- Mortgage approvals for house purchase surged in July, returning to their pre-virus level. Looking ahead, given the strong pipeline of in–progress sales, lending may strengthen even further in the coming months. And on past form, the recovery in mortgage lending suggests that completed housing transactions will also rise much further over the next few months.
- Alongside stronger activity, house price growth has also strengthened. Both the Halifax and Nationwide index point to a v-shaped recovery in prices, more than reversing the falls seen in the spring.
- Activity in the owner occupier market surged in August. True, the RICS new buyer enquiries balance edged down to 63% – but that was still one of the strongest readings on record (8). On a regional basis, London saw the weakest recovery in new buyer enquiries, while on the other end of the scale, southern England and Yorkshire and Humber saw the strongest gains (9).
- Admittedly, survey data from builders show a weaker bounce back in demand (10). In any case, the data suggest that inventory levels picked up following lockdown – a factor that will support sales in the coming months (11). In line with that view, data from property portals point to rising stock levels on the owner occupier market, although rental stock availability is tightening (12).
- Interest rates on high LTV mortgages rose rapidly in August (13). That may weigh on demand in the coming months, although rates on the more popular lower LTV products are broadly unchanged.
Chart 8: RICS New Sales Instructions and New Buyer Enquiries (% Balance)
Chart 9: New Buyer Enquiries by Region
Chart 10: Housebuilders’ Reported Net Reservations and Site Visits (% Balance)
Chart 11: Unsold Stock per Surveyor
Chart 12: Online Property Listings in 8 Major UK Cities (Daily, 000s)
Chart 13: Average Quoted Rate on 90% LTV Mortgage (%)
Sources: RICS, HBF, Rightmove, Refinitiv
- Mortgage approvals for house purchase rose to 66,300 in July. That was a V-shaped recovery following its earlier collapse, although re-mortgaging has seen a more gentle rise (14). HMRC data on transactions has also been fairly subdued so far. But given the time lag between mortgage approvals and housing sale completions, transactions are also likely to surge in the coming months (15 & 16).
- Gross and net mortgage lending saw a relatively modest fall during lockdown (17). As completed housing sales pick up across August and September, we expect both to rise strongly. Net advances may see a particularly large gain due to the effect of mortgage holidays, which suppress repayments while adding unpaid mortgage interest to the loan principal.
- Looking further ahead however, we expect housing sales to cool once more as pent-up demand from lockdown fades. Indeed, there are already tentative signs of cooling buyer interest in the Google search data (18). Consistent with that, surveyors expect strengthening housing sales over the next few months, but falling sales on a one-year horizon (19).
Chart 14: Mortgage Approvals (000s per Month)
Chart 15: Housing Transactions (000s per Month)
Chart 16: Newly Agreed Sales and Transactions
Chart 17: Gross and Net Lending (£bn)
Chart 18: Google Searches for Property Portals (Index)
Chart 19: Surveyors’ Sales Expectations (% Bal.)
Sources: Bank of England, HMRC, Google, RICS, Capital Economics
- Post-lockdown house price growth has so far exceeded our expectations, with the main house price indices recording price gains of between 1.5% and 2% per-month in July and August (20). That said, surveyors were a little more downbeat, with a majority reporting less than 2% house price growth in the three months to August (21). In line with our forecast, house price expectations are still weak compared to their pre-virus level (22).
- No reliable regional house price data for Q3 are available yet, but surveyor reports suggest that the South West, Wales and North West have performed the strongest since lockdown (23). Meanwhile, London price growth is lagging the rest of the UK. That probably reflects the increase in working from home, which has shifted housing demand away from dense city centres to the suburbs. (See our Focus.)
- Rental demand surged in August, while landlord instructions were flat (24). On past form, this points to rental growth of around 2% in the medium term (25). But given the disproportionate impact the virus has had on younger households, our outlook for rents is weaker. We expect a 2% fall in rents during 2021.
Chart 20: House Prices (% m/m)
Chart 21: Surveyors’ Reported House Price Change (Three Months to Aug., % of Surveyors)
Chart 22: House Price Expectations (% Balance)
Chart 23: Surveyors’ Reported House Price (% Balance)
Chart 24: Rental Demand and Lettings Supply (% Bal.)
Chart 25: Rental Demand/Supply Balance and Rents
Sources: Nationwide, Halifax, RICS, Refinitiv, Rightmove, Hometrack, CE
Table 1: Alternative Measures of House Prices
Avg. Price £000s
UK House Price Index (sa)
Sources: Rightmove, Nationwide, Halifax, ONS, Acadametrics, Land Registry
Table 2: Mortgage Borrowing and Residential Property Transactions
BoE Net mortgage lending £bn, sa*
BoE Value of new approvals, £bn, sa
– For house purchase, £bn, sa
– For remortgage, £bn, sa
BoE Mortgage approvals, 000s, sa
– For house purchase, 000s
– For remortgage, 000s
– Other, 000s
HMRC Transactions, 000s sa
Sources: Bank of England, HM Revenue and Customs
*% y/y refers to change in level of £bn on previous year
Table 3: Regional Snapshot
House prices, N’wide, %y/y
– Same period a year earlier
Property Sales, Land Registry
Sources: Nationwide, Land Registry
Hansen Lu, Property Economist, 020 7808 4988, email@example.com