Record house prices, an insatiable demand for new housing and pandemic-induced volatility in the market could all be on the cards for the property sector in 2022.

Downing’s Head of Property Lending, Parik Chandra, unpicks the current unsettled state of the property market. 

The housing market juggernaut continues 

Despite the stamp duty incentives coming to an end in September 2021, house prices continued on an upward trajectory. The December 2021 UK House Price Index placed the average price of a property at £274,712. That is a 10.8% increase when compared to 2020. It appears that pricing is showing no signs of plateauing.  

Will house prices crash in 2022? No is the short answer, save for an unforeseen systemic shock - though the longer answer depends on a variety of factors.  

Despite house prices being high already, generally I still expect to see growth over the next 12 months, but at a slower rate than we have experienced over 2021. Despite interest rates increasing to 0.75%, mortgage availability I imagine will remain robust. But, while everyone talks about the Housing Market, the reality is there is no such thing. The market is made up of thousands of micro markets and so pricing trends seen in one part of the market may not be linked to another. Not all properties are equal, and neither are all micro markets. 

As a nation, we are obsessed with home ownership and house prices, as so many of us view a house as both a home and an investment. At Downing, we take our role as responsible investors very seriously and look to help support the UK's housing needs, so as many people as possible can achieve the dream of having a home and their own asset. To make this happen, we focus on making secured loans to property developers delivering residential-led schemes nationwide. Additionally, we also provide wholesale finance solutions to fund bridging lenders to provide greater support to SME developers through a different funding strategy. 

Mass market housing to alleviate pricing 

From a governmental standpoint, initiatives are typically focused on the demand side of the housing market. I would like to see more government support that looks instead at the supply side as the disparity between supply and demand continues to push up house prices.  

Throughout 2021, there was a lot of pressure on supply chains and raw materials. The price of steel and timber inflated dramatically during 2021 due to increased demand and supply chain issues. Based on what we are seeing with the schemes we are currently funding some cost stabilisation has occurred, but higher costs remain a risk in 2022. Despite the impact this has had on developers margins, most SME developers remain eager to capitalise on a buoyant seller’s market. 

With the number of properties on the market not replenishing those that are being sold and the number of people looking to buy a property being 20.5% higher than the average for 2020, new housing has got to be a priority heading into 2022. As senior lenders, we aim to play our part in helping SME developers build mass-market housing which is less subject to pricing volatility. To support this, we’re proud to have facilitated the construction of over 1000 homes since 2017.  

With new houses increasingly in demand, we see this as an important social factor for the wider economy. We would like to engage with the government to reform policies around planning and housing delivery in the UK. Some councils can take over a year to determine relatively simple planning applications and that is a major hindrance to SME developers. 

In the House of Commons library, it states that “Governments since 2015 have pursued both supply-side and demand-side measures. There has been and continues to be, a desire to increase homeownership, particularly amongst first-time buyers... There is an expectation that most new building will be carried out by the private sector. To this end, much Government effort to stimulate house-building has been focused on planning measures to ‘make the system more open and accessible and tackle unnecessary delays.’” 

We welcome all initiatives that support increasing housing supply, but I do think there is some disparity between what has been pledged by the government and what has materialised. But house prices are likely to remain stable with an increased supply in the UK. As a lender, we want to see a stable housing market that encourages sustainable price growth supported by economic fundamentals, such as healthy supply and demand and a robust employment market.  

What will define 2022? 

A lingering theme from 2021 that will continue to define 2022 is pandemic-induced uncertainty. We are likely to see an unwinding of government schemes that were introduced to combat the pandemic. Even Covid-19 itself will present challenges and uncertainty as new variants come into play.  

Furthermore, we have found that Brexit has blurred into the background over the last year and it has been difficult to distinguish whether the current challenges are Brexit or Covid related. Either way, this will continue to impact the construction industry through labour and material shortages. Inflation is also having a visible impact on the cost of materials which developers may need to cost in. 

Property investors can look ahead to 2022 with reasonable confidence. But what I’m keen to keep an eye on is the environmental cost of development. Usually, the skyscraper is the ultimate symbol of prosperity, but green is going to be king in the next 12 months.  

New standards announced by the government in 2021 encouraged all new homes to produce 75-80% lower carbon emissions compared to current levels by 2025 and from 2021, new homes will be expected to produce 31% lower carbon emissions.   

By nature, new homes are more energy efficient than older ones, however this will still present a challenge to developers. But a challenge well worth taking on as all sectors set a course for the 2050 net zero target.  

Find out more information on the Downing Property Finance team.