Residential property prices will increase by 9% this year as the market is driven by the extended stamp duty holiday and the impact of repeated lockdowns, Savills has predicted.

The estate agent has upgraded its expectations from the 4% annual price growth it predicted in March, prior to the chancellor’s stamp duty holiday extension.

Savills still expect property values to rise by 21.5% over the next five years, in line with previous forecasts, as price inflation eases following the removal of incentives.

Price growth continues to be fuelled by historic low mortgage rates, along with greater demand from buyers for properties with more space and greenery following months of lockdowns.

However, the company says that the shape of growth over the next four years is more difficult to forecast precisely given the extraordinary conditions of the past 18 months.

“Some of the growth generated by the extraordinary market conditions of 2020 and 2021 could unwind at times during 2022, but we see nothing on the horizon that would trigger a major house price correction,” said Lucian Cook, Savills head of residential research.

Savills mainstream house price forecasts and economic assumptions:

Source: Savills, Oxford Economics

Cook continued “New buyer demand continues to outweigh supply despite the potential stamp duty saving falling from £15,000 at June 30 to just £2,500 until the end of September, and this against low levels of supply.

“This imbalance looks set to continue,  underpinning further price growth over the near term, particularly as people look to lock into current low interest rates.  But such strong growth in 2021 will leave less capacity for growth over the next few years, particularly as interest rates are expected to rise a little earlier than leading commentators had previously projected.

“The rate at which interest rates rise will also shape price growth. A steeper than anticipated jump in rates would restrict growth, although it would have to be severe to lead to actual falls in values – an outside risk in our view.”

Interest rate rises are critical to the forecasts, Savills says. The forecasts assume a Bank of England base rate no higher than 0.5% by the end of 2025.

A number of other key factors point to what Cook describes as a ‘soft landing’ for the market, rather than any dramatic correction in property values. 

Since the market reopened last year, price growth has been driven in large part by more affluent buyers, less reliant on mortgage debt and able to lock into low fixed interest rates. More generally, the pace of economic recovery has helped reduce unemployment levels, stress testing of lending is now embedded in the system, while interest rate rises are still expected to be slow and modest by the end of 2025, meaning a gradual squeeze on affordability.

These factors underpin Savills five-year forecasts, but they also indicate limited capacity for further price growth at the end of this period, without substantially affecting who is able to buy and the number of potential transactions. 

First-time buyers are likely to be increasingly reliant on government schemes and, where available, on the generosity of the bank of mum and dad, according to Savills. 

After a strong start to the year, and over 200,000 transactions in June alone, transaction volumes are projected to total 1.62m this, more than a third – 35% – higher than the yearly average over the five years pre-pandemic.

Savills continues to expect the markets of the Midlands and the North of England to show the strongest price growth, due to greater capacity for growth before hitting affordability ceilings.  In the short term, however, buyer attention is expected to turn back towards urban markets, including London, as social distancing restrictions and international travel restrictions ease.

This will see the ratio of regional to UK average values slowly converge over the next five years, as the lower value regions see stronger growth, “catching up” with the rest of the country.

Source: Savills (*Nationwide)

*Note:  Prime London and Prime Central London will perform differently.  5 year forecasts stand at +18.1% and +21.6% respectively