UK house price forecast – rise of 22% by 2026

The government’s official independent forecaster, the OBR expects UK house prices to rise by 22.7% by the end of 2026.  Why have house prices risen so sharply and why will they continue to grow?

Positive signs for UK Investors as OBR forecasts 22% growth in House Prices

The Office for Budget Responsibility (OBR) published their latest UK house price forecasts last month. The OBR is the government’s official, independent forecaster, who provides a detailed analysis of the UK’s public finances. It has five prominent roles, one of which is to provide economic and fiscal forecasting.

The OBR produces detailed five-year forecasts for the UK’s economy and public finances twice a year, usually accompanying the Chancellor’s budget statement in November and Spring Statement in March.   

In positive signs for UK property investors, the latest OBR forecast for UK economic and fiscal growth predicts further strong growth for UK house prices over the next 5 years.

Housing market forecasts

The OBR forecasts that UK house prices will rise by 22.7% by the end of 2026.

In its March 2021 forecast, the OBR expected that by the end of the year, house prices would rise 5.1% and subsequently fall by 1.7% in 2022.  However, in October, it revised its forecast, predicting that house prices will have increased by 8.6% by the end of the year and would grow by a further 3.2% in 2022. House price growth is anticipated to slow in 2023 (0.9%) and once again accelerate in 2025 (2.9%) and 2026 (3.5%). Read the OBR’s Economic and fiscal outlook – October 2021 here.

UK house price forecast

Are house prices expected to fall in 2022?

In March 2021, the OBR’s UK house price forecast expected that house prices would fall by 1.7% in 2022.  However, in October 2021, it revised its predictions and is now forecasting that house prices will rise by 3.2% in 2022. Far from an anticipated fall in price, house prices look set to rise every year until 2026.

Why have house prices risen so sharply?

House prices have risen rapidly since the start of the Coronavirus pandemic in the UK and many other parts of the world. The OBR has attributed much of this house price growth to people re-evaluating their housing needs favouring accommodation with more internal and outside space, creating a surge in demand for new houses.

The increase in demand for new housing has occurred while interest rates have been at all-time lows and sharp increases in household savings as people have been forced to curtail their spending due to several economic lockdowns. In addition, the UK introduced a Stamp Duty holiday reducing purchasing costs for both owner-occupiers and investors.

The Halifax and Nationwide indices both indicate that house price inflation reached its peak in July and August.  The OBR expects annual house price inflation to fall from nearly 11% in Q2 2021 to 0.5% by mid-2023, as interest rates begin to rise.

Why House Prices will Continue to Grow?

We expect house prices to continue to grow at a rate far higher than those forecast by the OBR, why? We believe that the OBR figures only take into account the immediate economic situation post the Covid pandemic. However, they do not take into account the broader issues in the housing market itself.

We expect house price growth to accelerate at levels significantly beyond those forecast by the OBR for the following reasons:

  • Land market – the UK land market remains expectionally tight and whilst house prices are rising rapidly so to are expectations for landowners in terms of how much they are expecting to sell their land for. It is impossible to deliver new housing without land to build it upon. As land prices increase so too do developers expectations in terms of sales prices, because in order to maintain their profit margin they must seek to increase prices.
  • Supply chain issues – the UK housing market is being plaugued by supply chain issues. As a result the cost of raw materials such as steel, copper, bricks and other materials are all seeing sharp price inflation. Ultimately these cost increases will be borne by purchasers.
  • Staffing Shortages – the impact of new BREXIT regulations has made it far more difficult for developers and subcontractors to get enough labour to meet demands from not only the housing market but other parts of the construction industry.
  • Lack of new supply – the UK housing market has for many years suffered from a chronic shortage of new housing supply. The UK government has never met its own new supply targets. The demand and supply imbalance causes further pressure on housing prices.
  • Housing reform – the UK government has for several years talked about introducing new reforms to the housing market to deal with the systemic issues to deal with the chronic supply issues. However, despite the govenements efforts they have simply not been able to deal with the issues and increase supply of new houses.
  • Developer taxes – in the last budget the UK government introduced a new developer super tax of 5% on profits over £25 m. The reality is the taxes will have to be borne by someone and guess what, this will be consumers.

Should I buy a house now or wait until 2022?

If you’re considering buying a property, either as a home or an investor all the indications are that house prices will become more expensive, the sooner you can buy the better.

With an interest rate rise on the cards in December, mortgages rates have already started to creep up, meaning the cost of borrowing is getting more expensive.  If you have a deposit saved and are in a position to buy now, you should.

Whilst those who already own property may welcome this news, this is not good news for first time buyers saving for a deposit.   Not only are prices rising, but it’s likely most would be first time buyers are saving less, as rents across the country continue to rise.  In London, rents have risen by 25 – 30% on average according to Chase Evans.

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