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A quick economic recovery, sustained fiscal support, and the housing-specific measures in the UK Budget mean it is likely that policymakers will successfully mitigate the adverse impact of the pandemic on the housing market. As a result, strategists at Capital Economics now think that house prices will avoid a fall, and instead rise by 3% YoY in 2021 and 2.5% YoY in 2022.

Key quotes

“The risks to the housing market from higher unemployment, both indirectly through its effect on sentiment and directly by causing distressed selling has reduced. Excellent progress in vaccination and government support to household incomes means that we expect a quick economic recovery when restrictions are eased.”

“We now think that most of the drop in employment is already behind us, and that the unemployment rate will peak at 6% at the end of this year. When we made our previous forecast that house prices would dip this year, we expected the unemployment rate to reach 7%.”

“While we still expect house prices to cool over the course of this year, we no longer expect them to decline. Annual house price inflation is set to remain high in the next two quarters as the base effect of a stall in house prices in Q2 2020, when the market was closed, boosts the annual comparison. But it is likely to ease off materially in Q4.”

“Our new annual house price forecast is +3.0% YoY in Q4 2021 and +2.5% YoY in Q4 2022.”