What's next for the housing market in 2022?

Making predictions is never easy. Back in May 2020, the Bank of England warned that house prices could fall by as much as 16% as a result of the coronavirus pandemic¹. Following this news, home owners – already navigating their way through an unprecedented situation – braced themselves for even more uncertainty. 

However, according to the latest figures from our Halifax House Price Index, the housing market is continuing to defy expectations. In fact, despite the impact the pandemic has had on the UK economy, average property prices were up 9.8% in 2021, an increase of over £24,500 – the largest annual cash rise since March 2003. 

The questions is, can such growth continue on into 2022? Well, at the time of writing, coronavirus is still present in the UK, with the hospitality sector particularly vulnerable to the latest Omicron variant. 

Put simply, despite significant developments in the vaccine rollout and fewer restrictions across the country, nothing can be taken for granted. 

What’s driving house price growth?

Over the last 24 months or so, the UK Government has brought in a number of initiatives to help curb the devastating effects of the pandemic and support the economy.

For the housing market, the most significant has been the Chancellor’s introduction of the Stamp Duty Land Tax (SDLT) holiday – whereby buyers completing a property purchase for less than £500,000 on or before July 1, 2021, would no longer need to pay for the cost of stamp duty. Those buying homes with a value above the threshold, on the other hand, would only pay tax on amounts above £500,000³.

These measures, combined with pent-up demand created by periods of lockdown, would have undoubtedly helped to drive activity during 2020 and into 2021. We also saw a significant number of transactions driven by the ‘race for space’, as home-working and long periods at home in general prompted buyers to look for bigger properties with more space. We expect these kinds of pandemic-driven shifts in housing preferences to continue well into 2022.

The impact of spending habits

In addition to government support, changed spending habits during the pandemic has also allowed prospective home buyers to save more money for larger deposits. It’s thanks to these factors that the market continues to look robust, but there are clearly still challenges ahead. 

The Bank of England has already acted to combat rising inflation with one interest rate rise, and we expect more to come in 2022 (albeit remaining at historically low levels). This, paired with further financial strains on households – such as higher energy prices – is also likely to reduce house price growth over the coming months.

With all of this in mind, here at Lloyds Banking Group, we expect house prices to maintain their current strong levels over the next year, but growth to be much flatter in 2022, at around 1%. 

Looking ahead

Beyond house prices, there’s also other trends we think will shape the market in 2022. For example, it’s clear that issues around affordability will continue to feature. 

Indeed, throughout the pandemic a combination of rising inflation and historically low interest rates meant that many first-time buyers were forced to save for higher house deposits than they may have bargained for. 

The good news looking into 2022, though, is that 95% mortgages are once again available to first time buyers.  And despite higher inflation and an increase in interest rates, average rates on those mortgages hit a record low in 2021, and continues to remain at low levels in January 2021⁴.

Rising house prices are actually a challenge for significant parts of the UK, though, with two thirds (67%) of the public believing that the UK housing market isn’t helping people get access to affordable and quality homes in their area. 

Moreover, both homeowners (60%) and renters (72%) agree that house prices are the biggest issue facing the market right now, and are sceptical that the housing industry  will be able to provide reasonably priced, quality homes post-pandemic. 

Already this year we’ve seen the House of Lords Built Environment Committee call for barriers to housebuilding, particularly for SMEs, to be removed in order to help improve housing supply. We expect continued political and industry focus on how we help more people access affordable and quality homes. 

We can also be confident that significant discussion will continue to be had around how the industry can help both old and new homes meet the UK Government’s sustainability targets. 

Indeed, for developers, building energy efficient homes has been a hot topic for a long time. And with more legislation to come, meeting new environmentally friendly standards in a way that meets the needs of homebuyers will be a continuing challenge. 

Lenders are increasingly focussing on this space, so expect regular product announcements throughout the year. It’s also increasingly important for homeowners who, aside from the savings on energy bills, could benefit from the fact that properties with the highest energy ratings are currently worth up to £40,000 more on average than those that are less sustainable, according to our research.  

As we say, though, it’s difficult to make solid predictions within the context of a pandemic. It’s important to remember that whether or not house prices rise or fall this year depends on a number of factors, not least coronavirus and the impact it may continue to have on the economy.