What does 2022 hold for UK house prices?

UK house prices are rising at their fastest rate since the financial crash of 2008. John Stepek looks at where they might go in the coming year.

Man looking in an estate agent's window
House prices are boosted by low interest rates and cheap borrowing costs.
(Image credit: © Cate Gillon/Getty Images)

2021 was a boom year for lots of things, and one of those things was the UK housing market.

The latest figures from Halifax, out this morning, plus those from Nationwide last week, basically show the same thing.

UK house prices rose at some of the fastest rates we’ve seen since before the last big crash (which happened around the 2008 financial crisis).

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The question now, for both beleaguered first-time buyers and hopeful landlords, is – what might happen this year?

Why 2021 was such an astonishing year for UK house prices

House prices in the UK rose by 9.8% in the year to December to a record high average of just over £275,000, reports Halifax. Nationwide came out with a similar figure – an increase of 10.4% to an average of nearly £255,000.

That’s apparently the strongest growth in any calendar year since 2006 (which was, of course, not long before everything collapsed). And, as Nationwide adds, it means that house prices ended 2021 a grand total of 16% higher than they were at the start of the pandemic.

This time last year, in MoneyWeek magazine, after a strong year for the market in 2020, I gave my best guess on what would happen to house prices in 2021. I concluded that prices would “range from flat (if they take a breather) to potentially rather higher (if the economy recovers faster than expected)”.

I’m not going to give myself any brownie points for that as it turns out that the “potentially rather higher” really was “very much higher”.

Anyway – we’re no longer surprised by the fact that a world-stopping plague proved to be good for UK house prices, but let’s remind ourselves of what drove the gains.

Firstly and most importantly (and this won’t surprise regular readers one bit) – house prices are boosted by low interest rates and cheap borrowing costs. The pandemic was not good news for the economy. But it did trigger another round of money printing and rate-cutting, not to mention significant government spending.

With interest rates at record lows, house prices practically couldn’t help but go up. And last year, despite the tiniest of rate rises at the end of the year, momentum remained strong and competition between banks for business increased.

As a result, it’s still easy to get a home loan and it may well get even easier for the time being, as lenders – unable to drive rates much lower – get creative with terms instead (remember that offering someone a 40-year fixed-rate loan involves taking on a lot of rate risk when rates are at all-time lows).

The other important point is that transactions rocketed during the pandemic. Property deals returned to levels not seen since the boom years before the (you guessed it) financial crisis.

Finally, it’s also worth pointing out that one of the biggest worries – that the end of furlough would trigger a big leap in unemployment – hasn’t happened. Oh, and that the stamp duty holiday might have shifted transactions around a bit but overall hasn’t done much.

What’s the outlook for 2022?

The question now is: what happens in 2022?

One (minor) piece of good news is that the increase in prices last year was mostly about the rest of the UK catching up to London rather than the capital becoming even more ludicrously overpriced. (London prices rose by 4.2% versus 15.8% in Wales, for example).

What’s good about that? Well, if the beneficial aspects of cities (added creativity etc) still function in a hybrid working environment (and I suspect they do), then it’s helpful that young people might have a hope of living there.

It’s also better to spread the housing “wealth” around the country, in that homeowners who see values rising in their local towns or suburbs might feel the divide between country and urbanites less keenly.

But overall this is not a healthy development. To have house prices rocketing so far ahead of incomes is bad news economically. High house prices make all sorts of other economically and socially important things much harder: from labour mobility to family formation.

In an ideal world, as we’ve said before, houses would get cheaper the gentle way. Wages would rise faster than prices, so prices would fall in “real” terms, and property would become more affordable without anyone’s personal balance sheets being utterly demolished (which would also be bad news for banks incidentally).

Unfortunately, that “happy” outcome seems rather further away than it did in the mid-2010s.

So what will we see now? When it comes to share prices in general, for example, both higher interest rates and rising inflation can have a negative impact. Rising rates squeeze indebted companies, while rising inflation might also push investors to demand better value (and so they won’t be willing to pay such high price/earnings multiples for shares).

With property, it’s a bit trickier to parse. Rising interest rates may drive up the cost of credit and that should in turn reduce the amount available to spend on houses, which in turn would push prices down.

But inflation is a trickier question. If inflation drives up rates and the cost of credit, then you have the same overall effect. But that won’t necessarily be the case. Inflation is already a lot higher than interest-rates are, and it so far isn’t making a huge difference, partly because people (probably rightly) assume that central banks will put a lid on rates in order to avoid bankrupting their governments.

Meanwhile, investors often see property as somewhat inflation-protected – particularly if you can buy with cash or cheap long-term debt.

On the flipside, there’s a definite risk this year that real incomes will be squeezed, despite rising pressure on wages. Energy prices are already seeing eye-watering increases which will become more apparent next year as a) people roll off fixed rates and b) the energy price cap jumps in April. There’s also the planned tax increases in April. Unless wages rocket in the next few months, it’s hard to see how the average pay rise won’t be eaten up by these two factors alone.

So if you asked me to put money on it, I’d bet against UK house prices seeing double-digit increases again this year but I doubt they’ll fall (certainly not in nominal terms) because that would most likely require significantly higher interest rates.

Might we see some political movement on property taxes?

As a wildcard, I do wonder if this is the year when we finally see someone grasp the nettle of looking at how we tax residential property in this country. It’s viewed as political suicide (understandably), but given enough pressure from a rising cost of living and those who feel locked out of the market, the idea might just pick up steam.

Particularly if those who make the bulk of their money by selling their time and labour start to notice that their income is being taxed far more aggressively than any gains generated by the overpriced boxes they have to live in.

(I’m not necessarily saying this would be a good thing, by the way. I’m pro-land value taxes, but I’d like any new property taxes to replace income taxes, not just be added on top, which is of course, what would happen.)

Anyway – we’ll see what happens. Speaking of land value taxes, I note that author and economist Fred Harrison, the man who correctly deployed his theory of an 18-year property cycle to predict the 2008 property crash in MoneyWeek’s pages in 2005 (yes, three years before it happened) reckons the boom will continue until 2026 (which is no surprise, given that’s 18 years since the last big crash).

So much as I’d like to think that prices might become more affordable in the near term, I’m not sure I want to go up against a man with that sort of record.

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.