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House prices scale new heights, but inflation may well halt the ascent

Monopoly property image
  • Average house prices reached another record high of £276,091 in December.
  • During 2021, the average price rose £24,500 – the biggest gain since 2003.
  • Prices rose 3.5% in the three months to December – the highest quarterly growth since 2006.

The Halifax House Price index for December is out today: december-2021-halifax-house-price-index.pdf

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown, comments:

“House prices scaled new heights by the end of  2021, with record prices and the kind of rapid rises we haven’t seen in almost two decades. But inflation could bring this high-speed ascent to a shuddering halt.

2021 created an environment that was ideal for rampant price rises. The stamp duty holiday, rock bottom mortgage rates, lockdown savings, the race for space, and the fact there were so many more buyers than sellers, all fed into a surging market.

We would always expect growth to slow after this kind of boom, because people have brought forward house price purchases. So many people are now in a bigger home and have spent their lockdown savings, that demand will naturally fall back. We can therefore expect house price growth to slow as we go into 2022.

How much it slows will depend to a great extent on inflation. Higher inflation can deal a double whammy to house prices. It costs more to make ends meet, so people have less cash to save for a property move, and struggle to afford a bigger mortgage. At the same time, higher inflation is likely to persuade the Bank of England to raise rates, pushing up mortgage costs too.

We expect inflation to rise to as much as 6% in the spring, but an awful lot will depend on how much the energy price cap is hiked in April, and whether any support from the government is forthcoming. More support could keep a lid on inflation, while runaway gas prices, accompanied by increases in the cost of everything from petrol to fresh food and furniture could push inflation even higher.

The market is currently pricing in a rate rise in February to 0.5%, with more rises through the year. Right now, mortgage rates have lifted from record lows, but remain incredibly cheap. With more rate rises on the cards, we could see mortgages become less affordable, which will put the brakes on the housing market. The kinds of rates being predicted aren’t likely to be enough to precipitate market falls. At the same time, the imbalance of more buyers than sellers should help keep a floor under prices. But the runaway house price growth of 2021 could very quickly become a thing of the past.

Of course, making firm predictions in a time of Covid is always fraught with uncertainty. New variants of concern, more lockdowns or closures of specific sectors could bring inflation down without the need for a series of rate rises. Alternatively, they could fuel more shortages, and push prices sky high. The economy could surprise either on the upside or the downside.

This makes it incredibly difficult to base your financial position on what you feel will happen to inflation, interest rates and house prices. Instead, it comes back to making the right decision for your own financial position, so you’re prepared for whatever 2022 holds in store.”

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