Global consultancy Knight Frank recently revised its UK residential house price forecast upwards, with the firm saying the supply of houses coming onto the market is rebuilding more gradually than initially anticipated.
This insight resulted in Knight Frank predicting that price growth will end the year in high rather than mid-single digits.
Tom Bill, head of UK residential research at Knight Frank, said: “We still believe annual growth will return to single digits by the end of the year as supply builds and demand is put under pressure by rising mortgage rates and spiking inflation.
“House price growth is peaking as supply rebuilds and mortgage rates normalise,” says Bill, “But one lesson from the pandemic is that nothing reverts to normal overnight, which is particularly true in a relatively slow-moving market like residential property. We, therefore, expect a more gradual return to earth for prices.”
Bill concluded: “The distortive effect of low supply has also kept rental value growth high. A sharper slowdown in the sales market would have boosted supply and increased downwards pressure on rents as owners let out property that failed to sell for the asking price.”
A slow and steady recovery
It’s no secret that with inflation at a 40-year high and interest rates at their steepest in 13 years, annual house price growth escalated to 12.4% in April, according to recent data from the ONS. Meanwhile, both Nationwide and Halifax reported double-digit growth in May.
In its latest quarterly analysis of house price growth across the country, Knight Frank points out that the housing market is taking longer than expected to recover from the distortions caused by the pandemic and stamp duty holiday.
As a result, it has revised up its UK house price forecast to 8% from 5% in 2022.
Furthermore, it has increased its forecast for prime central London (PCL) to 4% from 3.5% as the market continues to be boosted by robust domestic demand while international buyers also make their gradual return to the capital.
What’s caused the revision?
The low levels of new housing supply coming to the market has been the catalyst for the revision, with the firm arguing that supply has been the key story of the pandemic for the UK housing market, saying that it has largely failed to keep pace with demand, particularly during the frenetic conditions of the stamp duty holiday. This, in turn, has put upwards pressure on prices. It says prospective sellers were often unable to find purchase options of their own, thus causing a vicious cycle.
Nevertheless, Knight Frank says listings have picked up in recent weeks following the Bank of England’s decision to raise the base rate to 1.25% and issue a series of stark economic warnings.
More sellers have come forward in the belief that house prices may be peaking.
The firm has revised its rental forecast for PLC and POL in 2022; and now expects rental value growth of 11% in PLC and 9% in POL, up from 8% and 5%, respectively.
Knight Frank believes stock levels will be particularly squeezed during the course of the summer as high demand from corporate tenants and students outstrips available supply.
It says all other forecasts remain unchanged and will be reviewed in Q3.