Capital Economics: House prices to rise by 5% next year

By Ryan Bembridge

House prices are expected to increase by 5% in 2022, as the low interest environment is set to continue having a big effect.

That’s the view of financial consultancy Capital Economics, which would mean investors can still take advantage of substantial house price inflation, even after prices have seen double digit growth this year.

Another factor is more people will continue working from home, meaning that they are more likely to prioritise their living situations.

The prediction comes despite Capital Economics anticipating interest rates rising to 0.25% in Spring 2022 and 0.50% in 2023. Until last month it expected rates to be held until 2023.

Andrew Wishart, property economist at the consultancy, said: “We are increasingly of the view that home working will increase the amount households put towards housing costs.

“And lenders appear to be prepared to accommodate households’ increased appetite for housing, judging by the recent jump in the average size of mortgages approved.

“Indeed, even after accounting for the recent upward revision to our 2022 house price forecast from 3% to 5% and our new, higher, interest rate profile, affordability would remain manageable.”

“As a result, we are comfortable sticking with our above-consensus forecast that annual house price inflation will only cool gradually from 10% in Q4 this year to 5% in Q4 2023.

“The consensus is for a sharper drop off in house price growth to 3.5% next year.”

He added: “We recently revised up our forecast for Bank Rate for two reasons. First, underlying pay growth and inflation expectations have risen by more than we expected.

“And second, rather than being concerned about stalling economic activity over the summer, the Bank of England’s Monetary Policy Committee (MPC) agreed that growing upside risks to inflation had “strengthened” the case for a “modest tightening in monetary policy”.

“We now expect the MPC to hike Bank Rate to 0.25% next spring and to 0.50% in 2023. Previously we hadn’t expected interest rates to rise at all until early 2023, and to only reach 0.50% in 2024.”