House prices could drop 7.5% this year as the UK economy battles to fight off the damage caused by the coronavirus pandemic, according to estate agent Savills.
Savills warns that the damage done to the UK economy due to the Covid-19 pandemic will lead to a short-term deterioration in house prices, with a uniform dip set to be experienced across all parts of the country.
The estate agent made the recalculation to its residential market forecast, first published in November, following a new analysis of data reflecting the impact of Covid-19.
However, there could be a bounce-back in 2021. Savills predicts a 5% increase in house prices next year, and by 2024 house prices will have risen by 5% over the five-year period.
This forecast is lower than the 15.1% increase Savills predicted in November, reflecting a scenario presented by Oxford Economics where a downside economic scenario with a longer lockdown leads to a more persistent economic contraction, and a longer, slower recovery.
“In the short term, weak consumer sentiment will limit any bounce in activity following the housing market reopening. Over the coming years, a higher unemployment rate will impact perceptions of employment and financial security, which hold the key to both house prices and transactions,” Savills said.
“We are currently seeing a release of pent-up demand, which may trigger a brief spike in transactions in England over the summer. But uncertainty around values and rising unemployment will add to lender caution, particularly when lending at higher loan to value and loan to income ratios.”
Income growth is also expected to play a major role in both high prices and transactions over the next five years, Savills said, as well as any changes to interest rates – the Bank of England base rate is currently at a historically low 0.1%.
Savills also notes that the risk of a ‘hard Brexit’ at the end of the year could restrict housing transactions, as uncertainty might slow any rebound in the economy.
“We have followed the Oxford Economics assumption that the Brexit transition period will either be extended beyond 2020 or that we will see a stopgap deal allowing trade to continue until the full detail is agreed.
“Should the UK revert to trading with the world on WTO terms, economic growth would slow, which would negatively impact housing market performance.”
Transaction volumes are expected to stabilise by 2024, however, in line with Savills’ November forecast, while the coming months and years could see restricted buying and selling activity.