Ray Boulger’s 2021 Forecasts
Written on 22 December 2020 by
Back in the Spring of 2020 it looked as if the pandemic would make most forecasts for the year look silly. However, it is a measure of the strength of compensating action taken by the Government that not only were many forecasts no further out than in most years, but some - in particular house prices - underestimated the strength of the market.
The Nationwide house price index was 6.7% up in the first 11 months of 2020 and the UKHPI (UK House Price Index) annual increase to October was 5.4%. I expect prices to continue rising until February 2021 (March for the UKHPI as it is based on completions) as buyers try to beat the 31st March deadline to save SDLT (Stamp Duty Land Tax).
Therefore 2020 is likely to end with an increase of approximately 7.5% but - unless the Chancellor extends the SDLT holiday deadline - after a small rise at the beginning of 2021 prices will fall back. Not only will there be fewer buyers because some have brought forward their purchases, but many who are still in the market will adjust their buying levels to reflect the fact that their SDLT bill will increase.
However, I don’t expect prices to fall far as even after 31st March several positive factors for the market will remain, or emerge during the year, and these will go a long way to offsetting major negatives - such as the ongoing economic impact of COVID-19, including increased unemployment.
One of the consequences of COVID-19 was the looser monetary policy adopted by the Bank of England and, whether or not Bank Rate moves into negative territory, the expectation that it will remain low for longer. The fall in Bank Rate, additional QE and changed expectations of future interest rate trends has pushed gilt yields sharply lower. This has reduced the cost of fixed rate mortgages, except at the higher LTVs (loan-to-values) where a massive reduction in supply has pushed rates up.
Nonetheless the availability of 90% LTV mortgages has improved dramatically in the last few weeks and I expect the current huge price premium over lower LTV rates to start reducing as more lenders increase their maximum LTV to 90%. Furthermore, 95% LTV rates will start reappearing in the first half of 2021 and this will allow some potential purchasers who are current frozen out of the market - assuming they don’t want to buy a new build property - to enter it.
Another positive factor can be implied from minutes of the 8th December FPC (Financial Policy Committee) meeting. The minutes, albeit with a caveat, “suggested that the current affordability test might provide greater insurance now against a plausible rise in rates than it had when the measure had been introduced.”
This is a strong indication that the FPC will reduce the impact of one or both of the current stress tests (affordability test based on the lender’s revert to rate + 3% and no more than 15% of new lending to be at 4.5x income or greater) at its March meeting. This would give lenders the option to increase the maximum loan available to some borrowers.
The current yield curve presents an ideal opportunity for lenders to offer a fixed rate for term with low ERCs (early repayment charges), say limited to 5 years, and of course there would be no logic in applying any interest rate based stress test if the interest rate was fixed for the whole term. A 25 - 30 year fixed rate mortgage with a sub 3% rate and ERCs for no more than 5 years would provide further opportunities for some potential buyers.
The new build sector, as elsewhere in the property market, has seen strong demand in the second half of 2020 but one challenge it faces in 2021 is the revamp of the English Help to Buy scheme. The new scheme from 1st April 2021 will not be available to about 40% of buyers using the current scheme, due to the regional price caps and the fact it’s limited to first-time buyers. However, as a result of developer support 95% LTV mortgages are likely to become available on new build properties and this will be an important factor supporting sales which otherwise would have been lost due the Help to Buy changes.
By the end of 2021 we should have a much clearer idea of how many people who used to work in offices but now work at home will continue to work primarily, or to a considerable extent, from home. Greater clarification of this will have huge implications for many businesses as well as government policy, but as far as the housing market is concerned the degree to which the trend to live further away from town and city centres and to want more space is likely to continue.
Several banks have already said they plan to have a significant proportion of their customer service staff working largely from home on a long term basis and the experience of companies and their staff in 2020 will no doubt be the subject of considerable debate, in and out of the boardroom, for when the opportunity to return to office working arrives.
However, it seems likely that in addition to all the normal reasons people want to move home their 2020 experience will mean that the factors of wanting more space and not needing to be so close to the office will add an additional reason to move. This suggests that the current impact on prices of different types of property and types of location has further to go and will also be a positive factor in stimulating the number of housing transactions.
Some who want to trade up in terms of space will be able to do so without increasing their mortgage by moving to a different location but for some who need a larger mortgage to facilitate a move, a reduction in the FPC mandated stress tests as outlined above, will help them buy the home needed to reorganise their lives.
The above leads me to conclude that there will continue to be greater local and property type variations than normal in house price movements in 2021, but that on a national average basis the small initial price rise I expect in Q1 will subsequently be reversed and prices will end the year 2 - 3% lower, thus still showing an increase of about 5% over the 2 year period to end 2021.
Categories:Property Market, Bank of England, Mortgages, Ray Boulger
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