Sales volumes and market liquidity low by historic standards

Housing sales volumes (recorded by HMRC) have been stuck at 1.1m to 1.2m for the last 6 years - in line with the 50-year average, indicating the average household moves once every 20 years.

In 2019 sales were 5% lower than 2016. At a regional level, sales in London and the South East were 30% and 20% lower than in 2015 as tax changes and mortgage regulation impacted demand and activity.

The reality is that sales volumes have already contracted, limiting to some degree, the scale of further falls in volumes. In the 2008/09 recession sales fell below 900,000 a year, meaning we are not so far from this baseline.

Lower market liquidity may well create scarcity which, in turn, supports pricing but it also makes for greater volatility in house prices with more variation in price trends between local markets and within property types.

No excess over-valuation of UK house prices

History shows that house price falls tend to be exacerbated when following periods of high and unsustainable price inflation in the 2-3 years before the market turns.

Mortgage regulation and tax changes have limited the use of greater borrowing to bid up the cost of housing. Price growth has slowed over recent years with prices falling in London and southern England over 2018-19.

The house price to earnings ratio by region and country reveals most areas are in line with the 15-year average with affordability remaining manageable in many regions outside southern England.

Affordability levels have improved in London but remain a barrier to any rapid growth in sales volumes or prices.

Sales completions 6% lower in 2020 and unchanged over 2021

The sales pipeline is 50% bigger than this time last year and we expect completed UK housing transactions to be 1.1m in 2020, just 6% lower than in 2019 – a major improvement on the outlook earlier this year.

Sales have rebounded faster and off a lower base in London and southern England where we expect sales completions in 2020 to be up to 7% higher than in 2019.

Sales completions in Scotland, Wales and Northern Ireland are expected to be lower than in 2019 by up to 12% with their markets closed for longer in 2020 than across England.

Looking ahead to 2021 there is a sizeable pipeline of sales that will complete in Q1 which will provide a boost to the annual total - we expect completed sales in 2021 to be in line with 2020 levels at 1.1m.

If it was not for this ‘boosting effect’ we believe sales completions would have totalled 1m, down 9% on 2020.

Stamp duty disruption to Q2 2021

Notwithstanding our view that the current drivers of demand are not solely a result of the stamp duty holiday, history shows that these tax deadlines do distort the profile of completions in the immediate period after.

Our forecast for turnover in 2021 assumes that sales completions to run 20- 30% below normal levels over Q2 2020 and to then run 10% below 2019 levels until the year end.

This reflects economic factors impacting market sentiment and that fact that a proportion of sales are likely to have been brought forward into 2020 and 2021 Q1.

Much depends upon the economic outlook and progress for national vaccine to suppress the pandemic. Assuming the economic outlook improves, and employment levels start to recover later in 2021 we see scope for a stronger rebound in sales volumes in 2022 taking them back towards 2019 levels.

UK house price growth close to 3-year high

All house price indices have reported a jump in price inflation in recent months driven by strong demand, more sales and a shift in the mix of homes transacting with more sales in wealthier demographics and at higher prices.

Not all indices manage the changing mix of transactions in the same way hence the variation in reported growth rates. Our house price index is based on the largest sample of pricing for any index - using data from completed sales, mortgage valuations and newly agreed sales. The annual growth rate is as high as in December 2017.

UK house price growth slows to +1% in 2021

In order to inform the outlook for house prices Zoopla Research have developed a multi-factor forecasting model using a combination of long run macro factors and unique, high frequency data on the housing market.

The core output is a one-year house price projection at region, country and national level. We expect house price inflation to end 2020 at 4% and then slow to 1% by the end of 2021 as weaker demand and economic uncertainty reduces the upward pressure on prices.

At a regional level we expect growth to fall within a narrow range between +1.75% in Scotland to +0.5% in the East of England.

These central forecasts reflect the price change for all UK housing based on the transactions that take place in the year. Shifting patterns of demand and an uneven economic impact from the pandemic means local market factors will continue to drive activity levels and pricing in local markets.

There is a distribution of growth around the national and regional averages. The improvement in growth is widespread with 80% of homes in markets with annual growth rates of >2% or higher, a clear shift from this time last year.

Looking further ahead, we expect levels of sales inventory to remain below average over 2021 creating a scarcity of homes to buy. There may be some over-hang of stock from the current boom in supply that does not sell but we still see a lack of supply supporting pricing.

Any sustained improvement in the economic outlook that boosts demand would feed into house price growth.

A resilient market but one that needs more liquidity

At the start of 2020, many businesses operating in the housing market were expecting a bumper year as market activity ramped up in the wake of the General Election.

The pandemic put paid to that in the second quarter, but the scale of the rebound has driven a remarkable turnaround. 2021 is set to be a year of transition as the nation continues to adjust to the pandemic and the roll out of vaccines to control the transmission of COVID19 so life can return closer to normal and the economy can continue to recover.

The cost of the pandemic has taken national debt to a record high with taxes set to increase in the years ahead to start to pay down debt.

In the sales market, the long run trend has been one of persistently lower levels of housing sales as a proportion of all private homes. In 2021 we expect just 4.5% of homes to transact, compared to a 60-year average of 7% and a high of 12% in 1988 (a homeowner moving every 8 years).

A combination of demographic, social, policy and economic factors have all acted to reduce the liquidity of the housing market to a level that can’t go much lower in our view.

Housing plays a very important role for the economy as we have seen in 2020. The pandemic has re-enforced the importance of the home to UK households and this will continue to support the market in 2021.

As we emerge from the current crisis it is vital that policy makers focus more on boosting the liquidity of the housing market that can support labour mobility, economic growth and better housing choices for all households.

Housing as a store of wealth, an ageing population and faster growth in older, single person households will all act to shape how the market evolves in the years ahead.

New challenges lie ahead, not least the green energy and low carbon agenda which will be the next big policy impact on the housing market.

While the COVID-19 pandemic may have created a lifetime revaluation of housing, more and faster change will only add to the complexity of how households evaluate their housing requirement, now and into the future.