Market in Depth

UK's house price growth highest in almost 18 years

Lalaine C. Delmendo | June 22, 2022

UK house prices continue to rise strongly, amidst robust demand and a chronic housing shortage. The average house price in the UK increased by 12.6% to £260,771 (US$ 320,258) during the year to Q1 2022, according to Nationwide – a sharp acceleration from the previous year's 6.3% growth. In fact, it was the country's largest house price rise since 2004. When adjusted for inflation, house prices rose by 6.3% in Q1 2022 from a year earlier.

All other regions saw house price rises during the year to Q1 2022, with London registering the lowest growth of 7.4% to an average of £518,333 (US$ 636,615) – up from the prior year's 4.8% increase. London's prices are now about 70% above 2007 peak levels.

Wales saw the biggest growth, with house prices rising by 15.3% during the year to Q1 2022 (9.3% inflation-adjusted). It was followed by the South West and East Anglia, with price increases of 14.4% and 14.2%, respectively. Strong house prices were also seen in Yorkshire and Humberside (13.5%), East Midlands (13.5%), Outer South East (12.8%), North West (12.4%), Scotland (12%), West Midlands (11.7%), Outer Metropolitan Area (11.4%), Northern Ireland (11.1%), and the North (10.6%).

During 2021, residential property transactions in the UK soared by about 41.2%, to around 1,475,740, following a 11.2% decline in the previous year, according to HM Revenue & Customs. In the first four months of 2022, there were 385,060 residential property transactions in the UK, down 24% from a year earlier but still up 12% from the same period in 2019 before the pandemic. This was amidst the expiration of the temporary stamp duty holiday introduced during the peak of the Covid-19 lockdown.

Aside from robust demand, the acute housing shortage in the country is pushing prices up. About 8.4 million people in England are living in unaffordable, insecure, or unsuitable homes, according to the National Housing Federation. And despite the increase in residential construction activity last year, completions remain far below the government's target of 300,000 new homes every year.

The UK housing market is expected to continue growing, albeit at a slower pace, primarily due to rapidly rising borrowing costs, coupled with the inflationary pressures currently exerted on household budgets and the adverse impact of the Ukraine war. Savills predicts an annual house price growth of 7.5% this year.

Property listings website Rightmove, expects a more muted house price increase this year, of about 5%. It expects the most competitive markets of Scotland, West Midlands, South West, and Yorkshire and the Humber to see price growth above 7% in 2022, while London's price increase will be more subdued at 3%. Zoopla expects property values across the UK to rise by 3.5% by year-end, mainly due to economic headwinds, including increases in mortgage rates and rising cost of living.

“After a very strong first half of the year, it is likely that the housing affordability crunch will have a greater impact on market behaviour in the months ahead, with further interest rate rises anticipated during that period," said Tim Bannister of Rightmove.

United Kingdom house prices
The UK economy grew strongly by 8.7% year-on-year in Q1 2022, up from its 6.6% expansion in the previous quarter, buoyed by strong construction and services sectors. Yet on a quarterly basis, the economy advanced by only 0.8% in Q1 2022. Modest economic growth is projected this year at 3.7%, following strong growth of 7.4% in 2021 and a historic plunge of 9.3% in 2020, according to the International Monetary Fund (IMF).

In June 2022, the Bank of England (BoE) raised its key rate by another 25 basis points to 1.25%, its fifth consecutive rate hike since December 2021, in an effort to meet its inflation target of 2%. It is the highest level in more than 13 years.


Analysis of United Kingdom Residential Property Market »

Rental Yields

London's yields are low

London´s residential prices have been falling in the higher-end districts. But London remains by any measure extraordinarily expensive.

That impacts rental returns, since rents have not risen as much as prices. Gross rental yields, i.e., the gross annual rental return on an investment in an apartment if fully rented out, are now quite low in London.

On the whole, rental returns are better on the prime fringes than in central London such as this new property for sale in London.

Yet surprisingly, in the centre, larger apartments sometimes have higher yields - particularly in the more expensive districts of London. This defies the almost universal rule in other cities that smaller flats have higher rental returns. Why is it now different in London? Because of the UK´s amazingly high stamp duties on super-expensive property purchases, which are dissuading high-flyers from buying. People prefer to rent if they are staying just a few years, because the total costs of renting high-end properties are lower than the total costs of buying and then selling them. High capital gains taxes on sale, and worries about Brexit, reinforce the message that in London, renting now makes sense for the rich.

Foreign residential property investors in Britain have long faced a rising rumble of discontent from the British public about exorbitant housing prices in London, which rightly or wrongly is partly blamed on the large numbers of foreign buyers, as well as the continuous flow of immigrants into London. Both are hot-button issues.

One result is that foreign buyers are now liable to capital gains taxes when they sell their UK properties (previously they were exempt). Another is that stamp duty has been ramped up on higher-end properties. There is talk of further measures - it is widely agreed that Council Tax is too low on high-end properties, and the Liberal Democrats have been agitating for a mansion tax.

Round trip transaction costs are higher in the UK now than they were in the past, especially in London given higher stamp duties on expensive properties. See our UK residential property transaction costs analysis and our Residential property transaction costs in UK compared to other countries.

Read Rental Yields »

Taxes and Costs

Effective tax rates are moderate in the UK

Rental Income: Unless nonresidents take specific steps, they will be taxed on net rental income ssourced from the UK at a flat rate of 20%, which must be withheld by the tenant or letting agent. However, effective tax rates can be brought down to around 9% with all the allowable deductions.

Capital Gains: Capital gains are taxed are taxed at progressive rates, from 18% to 28%.

Inheritance: Estates or assets exceeding the current tax threshold of £325,000 (€433,333) are subject to inheritance tax at 40%. In calculating the amount of the estate, the value of any gifts made by the deceased within 7 years of death must be added (some small gifts are exempt).

Residents: UK residents are taxed on their worldwide income and on capital gains from disposal of their UK assets, and most likely on their overseas properties too.

Read Taxes and Costs »

Buying Guide

Roundtrip transaction costs moderate in Britain, can be high on high-end properties

Total roundtrip transaction costs range from 3.90% to 12.16%. Almost all buyers, UK-based or not, employ lawyers as well as real estate agents. Legal fees are around 0.5% to 1% while agent's fees are around 2% to 3.5%, plus 17.5% VAT.

Read Buying Guide »

Landlord and Tenant

UK law is pro-landlord

Rents: Landlords and tenants can freely agree on rent levels. They can freely agree any mechanism of increasing rent levels. Deposits are lawful.

Tenant Security: Contracts naturally revert to a standard monthly contract which, after an initial six month's period of security of tenure, allows the tenant to be evicted at two months' notice. However in practice the eviction process can disadvantage the landlord.

Read Landlord and Tenant »

ECONOMIC GROWTH

UK economy to grow modestly, inflation is surging

United Kingdom luxury homes
The UK economy grew strongly by 7.4% during 2021, following a historic plunge of 9.3% in 2020 due to the Covid-19 pandemic. Then in Q1 2022, the economy expanded further by 8.7% year-on-year, up from its 6.6% expansion in the previous quarter, buoyed by strong construction and services sectors, according to the Office for National Statistics. Yet on a quarterly basis, the economy advanced by only 0.8% in Q1 2022.

Economic growth is expected to slow in the coming months due to the impact of the Ukraine crisis and as surging inflation hurts the purchasing power of consumers. Recently, the International Monetary Fund (IMF) downgraded its 2022 economic growth forecast for the UK to a modest 3.7%, from its January’s estimate of 4.7%.

“Consumption is projected to be weaker than expected as inflation erodes real disposable income, while tighter financial conditions are expected to cool investment,” said the IMF.

Before the pandemic, the UK’s economic growth had been anaemic, at best. From 2001 to 2019, the economy expanded by an annual average of just 1.7%.

United Kingdom GDP inflation
The UK’s GDP growth per capita figures are also unimpressive. GDP per capita has been growing by an annual average of just 0.3% from 2010 to 2020, and actually plunged by 9.7% in 2020, according to IMF. GDP per capita grew by 6.7% in 2021, as pandemic-related restrictions were loosen and due to the low base effects in the prior year.

UK’s overall unemployment rate was 3.8% in the three months to April 2022, down from 4.9% a year earlier, according to the Office for National Statistics. In fact, it was the second lowest level in 48 years. The HM Treasury projects unemployment to be at 3.9% this year.

United Kingdom unemployment
Yet consumer prices are soaring! In May 2022, the UK’s inflation stood at 9.1%, sharply up from 2.1% a year earlier and the highest since the Office for National Statistics begun publishing the series in January 1989. Overall inflation averaged 1.6% annually from 2014 to 2021 but is projected to soar to 9.2% this year, according to HM Treasury.

The UK voted to leave the European Union (EU) in 2016 and officially left the trading bloc, its biggest trading partner, on January 31, 2020. Though, both parties agreed to continue their trading arrangements until December 31, 2020 to allow enough time to agree to the terms of a new trade deal.
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