We have experienced a UK housing market boom over the last two years. According to the latest figures published by Nationwide’s house price index, the average house price has increased by a whopping 12.6% (£29,162) between February 2021 and February 2022. It is the biggest annual increase Nationwide has ever recorded. This also means that the price of an average home is now over £260,000, that’s 20% (£44,138) higher than in February 2020, a month before the pandemic.
This increasing trend is the fastest annual rise of house prices since 2007 (just before the 2008 financial crisis), triggering record highs. Both the Office for National Statistics (ONS) and Halifax house price index show similar growth patterns throughout the last 24 months.
Still, as we begin to exit the pandemic with life returning back to normal and with the cost of living crisis, experts seem to be undecided on the housing market’s future – whether we will see further rising house prices or not. Making predictions isn’t easy; in May 2020, the Bank of England advised that house prices could fall by 16% due to the pandemic. This clearly did not come to fruition, with quite the opposite happening instead.
The question is, what might happen this year? Will house prices drop? Is now a good time to buy? Or will we see a housing market correction? Let’s take a look!
Will house prices fall in 2022?
Whilst house prices may not fall, the rate of growth is expected to decline steadily. With inflation, living costs, and interest rates all increasing, the surge in housing prices should stabilise. However, it isn’t easy to be certain as the strength of the property market has surprised us over the last two years and could continue to do so.
This may not be what first-time buyers want to hear. Over the last 18 months, the growth of house prices has significantly outpaced the growth of salaries, resulting in a housing market that is increasingly unaffordable for someone looking to get onto the property ladder. For now, it looks like the disparity will get worse before it gets better.
What’s driving house price growth?
Nationwide reported that in February 2022, average house prices in the UK rose by 12.6% in the past 12 months, to a record-high average of over £260,00. A staggering 20% higher than at the start of the pandemic. This surge in property prices since the pandemic has been due to a few reasons.
Over the last 24 months, the economy took a hit as a whole due to the pandemic, but the UK government introduced numerous initiatives to help offset the strain on the economy. It triggered a bunch of money to be printed, as well as significant government spending, which impacted the supply and demand of homes.
Stamp Duty Land Tax Holiday
The most impactful introduction was the Stamp Duty Land Tax (SDLT) Holiday. This Stamp Duty Holiday meant that buyers who were completing the purchase of a property before 1 July 2021, which was valued at less than £500,000, would be exempt from having to pay the cost of Stamp Duty – resulting in an additional £25,000 in savings for a property valued at £500,000. This was then extended from 1 July 2021 to 30 September 2021 for properties valued at £250,000 or less. Buyers rushed to get deals finalised before the deadlines, as shown by HMRC records of property purchases around those dates.
Historically low interest rates
The Bank of England reduced the bank rate to 0.1% in March 2020. Buyers pounced on this to take advantage of such low interest rates and cheap borrowing costs, and exemption from Stamp Duty costs. The already increasing pent up demand soared, which resulted in a buying frenzy and house prices soared.
Race for space
Another factor that contributed to a rise in house prices was a phenomenon known as the ‘race for space’. Restrictions imposed on UK citizens to halt the spread of Covid during the pandemic resulted in people spending considerably more time at home and in their local surroundings. That time at home has led to a change in housing preferences, whereby people are seeking properties that include more space inside their home and outside, with a greater requirement for gardens. These shifts in needs have not changed, and are expected to continue well into 2022, hence why we continue to see a rise in property prices.
Buyers bringing their timelines forward to take advantage of tax breaks, in combination with a greater need for space and low interest rates, have significantly exceeded the supply of houses which has propelled prices to record highs.
Where Have House Prices Risen the Most?
House prices increased in all UK nations, but some regions experienced more growth than others. At the time of writing this article, figures for Q1 of 2022 have not been released. Therefore, we’ll use data from Nationwide’s regional house price indices in Q4 of 2021 to showcase this.
Average house price by country and region
The average house price in England increased by 9.0% over the year to December 2021, with the average house price in Q4 being £290,034. Northern England showed a slightly slower increase compared to Southern England which saw the annual price growth exceed the UK average.
The average house price in Scotland increased by 10.1% over the year to December 2021, with the average house price in Q4 being £172,605, in line with the UK average.
The average house price in Northern Ireland increased by 12.1% over the year to December 2021, with the average house price in Q4 being £167,479 – the strongest end to the year the country has had since 2007.
The average house price in Wales increased by 15.8% over the year to December 2021, with the average house price in Q4 being £196,759. This was the first time that Wales outperformed all other regions in the UK.
| Country | Average Price in Q4 2021 | 2021 Annual Rise (£) | 2021 Annual Rise (%) |
| Scotland | £172,605 | £15,836 | 10.1% |
| Wales | £196,759 | £26,913 | 15.8% |
| Northern Ireland | £167,479 | £18,096 | 12.1% |
| England | £290,034 | £26,103 | 9.0% |
| London | £507,230 | £20,668 | 4.2% |
| Outer Metropolitan | £410,992 | £33,316 | 8.8% |
| South West | £294,845 | £30,333 | 11.5% |
| Outer South East | £329,869 | £33,579 | 11.3% |
| East Anglia | £268,146 | £25,342 | 10.4% |
| North | £148,105 | £10,574 | 7.7% |
| North West | £196,806 | £19,882 | 11.2% |
| Yorkshire & Humberside | £190,855 | £18,530 | 10.8% |
| East Midlands | £221,813 | £20,861 | 10.4% |
| West Midlands | £227,031 | £19,428 | 9.4% |
Source: Nationwide
What could weaken the housing market in 2022?
The current surge in house prices won’t last forever, and 2022 could be when the trend stops. Essentially, house prices are a function of supply and demand, and whilst the early 2022 data shows demand is still much higher than housing supply, it is expected to flatten out.
Rising Inflation
According to recent publications by the ONS, inflation rose to 5.5% in the 12 months to January 2022 – the highest recorded 12-month inflation rate in 25 years. This can be seen in the eye-watering increases of items such as food and energy. With the cost of living crisis, the energy price cap jump in April, and tax increases in April – combined with the lack of growth in wages – people’s disposable income will reduce further and could result in not being able to afford moving homes – not simply because house prices continue to be too high, but also their ability to support mortgage payments will diminish, affecting first-time buyers the most.
Increase in interest rates
To offset higher inflation rates and meet their 2% target, the Bank of England increased the bank rate from 0.1% to 0.25% in December 2021, to 0.5% in February 2022, and then to 0.75% in March 2022. It is expected to grow much further by the end of the year. This will consequently increase the cost of mortgages, which should reduce the amount available to spend on houses, further dampening the housing demand and slowing prices down.
Transactions pulled forward in 2021
The buying frenzy related to the Stamp Duty Holiday fast-tracked many deals in 2021, encouraging many homebuyers to bring their plans forward. This has meant less supply in 2022 but also less demand. And when you factor in rising inflation and interest rates, this demand should decline even more, which should have a cooling influence on housing prices.
Is now a good time to buy a house?
It’s very much a seller’s market at the moment, guaranteeing you will pay a considerably higher price than if you had bought pre-pandemic. While many buyers hope that housing prices will fall, especially first-time buyers, there’s no guarantee that will happen, and other people may hold off moving until later this year due to the lack of supply, which would add to the problem.
But despite interest rates creeping up, mortgage rates are still reasonably low, and low-deposit mortgages are readily available. If you can afford to buy a home that you plan to live in for some years, it may be wise to pull the trigger as there’s no guarantee property prices will fall.
Summary
Over the last two years, we have seen an unprecedented rise in house prices caused by low interest rates, the Stamp Duty Holiday, and a desire for more space emerging from people being home-bound during covid restrictions. This trend has continued into 2022, and property prices are at record-highs.
But this trend may be slowing down over the year. Soaring inflation and rising interest rates could very much dampen the demand, which may cause house prices to stabilise. Although property prices are unlikely to fall, the rate of growth we have experienced should settle down. However, as we have seen over the previous 24 months, the housing market has proven to be incredibly resilient in challenging circumstances, so it’s difficult to confidently predict what might happen to house prices in 2022.
