UK property price growth will slow this year and is expected to produce only single-digit growth according to the latest forecast from Knight Frank.
The real estate and rental agency forecasts 5% annual growth in 2022, with only 1% growth the following year. He said higher mortgage rates, squeezing the cost of living and increasing supply will all act as a brake on runaway property prices.
But while he forecasts a general cooling in the market, Knight Frank predicts that prices in central London will buck this trend and should pick up as global travel resumes after the Covid pandemic.
Knight Frank is also more optimistic about the outlook in the buy-to-let sector, with the UK rents are expected to increase by 4% in 2022, building on the strong performance in the second half of last year.
Longer term, he expects supply constraints, strong tenant demand and robust earnings growth to support a 17.1% increase in rental values over the next five years.
Regarding the residential market, Knight Frank, Head of UK Residential Research, Tom Bill, says: “The UK property market has defied gravity during the pandemic. Tight supply, low interest rates, accumulated household wealth and a desire for more space and greenery have combined to produce double-digit growth in home prices over the past year.
“We think 2022 is when it starts to relax and growth returns to single digits.”
He says several factors will help slow the growth in home prices. “First, mortgage rates will continue to rise along with interest rates. The conflict in Ukraine may slow the pace of this normalization, but the Bank of England will be under pressure to respond to short-term inflationary pressures and the longer-term UK economic recovery.
“Fundamentally, we believe supply will continue to increase as the distorting effects of the pandemic fade. The lack of supply has been the main cause of the strong growth in property prices and the first signs of this spring suggest that inventories are piling up.
“Meanwhile, the ‘space race’ will calm down without completely disappearing. However, we believe that the cost of living compression will be stronger in 2023 and we expect house prices to climb 1% before starting to recover slowly.
Bill says that in the five years to 2026, Knight Franks predicts this will produce 13.6% cumulative growth in the UK. He says there will be regional differences, with the Midlands for example set to outperform as they benefit from post-Covid developments in the UK economy and growth in the logistics and life sciences sector.
He adds: “In central London, we expect growth of 3.5% this year as the property market inside Zone 1 continues its expected recovery after six years of political uncertainty and the emergence of a more unfavorable tax landscape.
“We expect growth to be 6% in 2023 as the return of international buyers accelerates. This is later than expected and shows that there is unlikely to be a single moment when foreign demand normalizes. Instead, the process will be more gradual and erratic as different countries deal with Covid-19 in different ways. We expect PCL to grow 22.2% over the period.
Optimistic forecast for BTL owners
Knight Frank, head of residential development research, Oliver Knight, says the rental market is being shaped by a growing imbalance of supply and demand.
“The number of properties available for rent in the first quarter of 2022 was more than a third lower than the five-year average before the pandemic. At the same time, the demand from tenants has steadily increased. The RICS residential survey said tenant demand rose to its highest level since 1999 in January, while new instructions from landlords remained on the decline.
“In part, the supply shortfall reflects the fact that some owners have left the industry due to tax and regulatory changes in recent years, a trend that we do not expect to reverse. We expect a shortage of rental housing relative to demand to be a key driver of rental growth across all regions in 2022, notwithstanding that near-term inflationary pressures will inevitably dampen larger increases as finances households are strained. ”
He adds: “In the coming years, supply will remain tight, but we expect earnings growth to act as the main driver of rents, renewing a long-term relationship and supported by a strong outlook for the rental market. There is room for stronger rent growth in parts of the country where rents are relatively more affordable, particularly in the North and Midlands.
He added that the prospect of further regulatory reforms towards the end of our forecast period, largely around minimum energy efficiency standards, could further limit mortgage homeowners’ supply.