UK Housing Market Forecasts

Published 1st of January, 2021

In this article, we set out our housing market forecasts for 2021. We forecast UK house price inflation of 5%; housing transitions in the range of 1.05 and 1.10 million; mortgage rates to fall and capital gains tax on property to rise as the Chancellor starts to repay some Government debt built up during the pandemic. The UK housing market was more robust in 2020 than most thought possible and whilst the end of the Stamp Duty may cause some turbulence along the way we do not expect it to push the housing market off course.

House Price forecast

Twindig expects UK house prices to increase by 5% in 2021.

We expect the house price inflation from 2020 to continue in January, February and March 2021 as homebuyers work hard to beat the Stamp Duty Holiday deadline of 31 March 2021.

House prices may soften by 1-2% in April and May following the end of the Stamp Duty holiday as demand softens and buyers and sellers renegotiate prices to reflect the hike in stamp duty costs.

Once the Stamp Duty impacts have played out we expect gradual house price inflation for the remainder of the year with house prices in December 2021 5% ahead of their December 2020 levels.

Housing transactions forecast

Our housing market transaction forecast is based on the following assumptions:

  • The current UK Stamp Duty Holiday ends as expected on 31 March 2021.

  • The UK housing market remains open throughout 2021

We expect housing transaction volume to be high in January, February and peak with a strong spike in March 2021, after which we expect them to fall in April. We expect that April 2021 will have the lowest volume of housing transactions in 2021.

Housing transactions will recover slightly in May and again in June with momentum building throughout the summer months with a secondary, although much lower, peak in September or October and volumes will reduce in November and December.

Overall we forecast UK housing transactions to be between 1.05 and 1.10 million in 2021.

Mortgage rate forecast

We see very little upward pressure on the Bank of England's official Bank Rate in 2021 and this is the rate which sets the scene for mortgage, loan and other credit interest rates.

The UK Government is heavily indebted with debt levels around £2,000 billion and will therefore not be eager to see interest rates rise.

Mortgage rates are therefore likely to be driven by lender's risk appetite rather than changes to underlying Bank Rate. If the Brexit trade deal is executed smoothly and if the COVID-19 vaccine roll-out is successful we expect mortgage rates to be at worst stable and at best to fall during 2021.

Loan to Value (LTV) Ratios will continue to play an important role in mortgage pricing with high LTV mortgages having a much higher mortgage rate than lower LTV mortgages. At the time of writing the average rate on a 60% LTV 2-year fixed-rate mortgage was 1.38% rising to 4.11% for a 95% LTV 2-year fixed-rate mortgage. We expect these mortgage differentials to remain during 2021. Assuming no change in Bank Rate we expect mortgage rates for a 60% LTV 2 year fixed rate mortgage to be around 1.30% and a 95% LTV 2 year fixed rate mortgage to be around 3.5% by December 2021.

Capital Gains Tax Forecast

As we enter 2021 Chancellor Rishi Sunak is reviewing the structure of UK taxes. The pandemic has been costly in both emotional and economic terms, UK Government debt is at an all-time high and eventually, these debts will need to be repaid. Taxes are therefore likely to rise.

Our working assumption is that Capital Gains Tax rates will be brought into line with income tax rates, higher rate taxpayers will therefore pay higher rates of Capital Gains Tax.

Currently, a taxpayer's primary residence is exempt from Capital Gains Tax. We do not expect this exemption to be taken away completely, but we would not be surprised if the amount of exempt gain was subject to either an annual cap, a lifetime cap or a combination of both. This would be similar to pension relief where the amount of tax benefit in any one year is capped as well as the taxpayers lifetime tax benefit.

Second-home and Buy to Let property gains are already subject to Capital Gains Tax at a higher rate (28%) than the capital gains on other assets (20%). We forecast that these rates will be equalised and reflect the taxpayer's income tax rates. This will mean a tax rate increase for higher rate taxpayers and a lower tax rate for those with earnings below the higher rate tax threshold. However, it is likely that a capital gain on a property will move a lower rate income taxpayer into the higher rate tax bands.

Housing repossessions forecast

According to UK Finance, in the first three quarters of 2020 there were 2,320 house repossessions (1,320 owner-occupied and 1,000 Buy to Let) compared to 5,940 in the first 9 months of 2019 (3,980 owner-occupied 1,960 Buy to Let). The repossession level was lower in 2020 due to the UK Government's encouragement for lenders to offer payment holidays.

We expect repossessions to be around 4,000 in 2021 as the UK Government scales back its housing market interventions. By comparison, our repossession forecast is still very low compared to the Credit crunch peak in 2009 of 48,900.

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Anthony Codling
CEO, Twindig

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