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House price growth will slow to 3% next year and transactions will drop by 20% in 2022 as the market rebalances following a frenetic year, according to forecasts by Zoopla.

However, its analysts do not believe we are seeing the cliff edge in demand that some expected following the end of the stamp duty holiday in September.

The total number of sales agreed in 2021 is on track to hit 1.5m, marking the strongest year since 2007, analysis from Zoopla suggests.

It says the total value of sales for 2021 will hit £473bn, up by 25% or £95bn on last year’s figure of £378bn.

Next year, it forecasts that transaction volumes will slow to 1.2m.

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It expects that headwinds for the next year will come from higher living costs and increased mortgage rates, dampening buying power.

Zoopla expects house price growth will slow from its current rate of 6.6% to around 3% next year.

It says the latest data points to a clear turning point for house price growth, which has now peaked and prices are now rising at a slower rate.

There is currently a huge regional variation in house price growth, ranging from 2.3% in London and 10.4% in Wales, and Zoopla expects above-average increases will continue in the most affordable markets.

Over the next year, it forecasts growth will be strongest in the North West and East Midlands at 4% and weakest in London at 2%.

Delving further into its analysis of the demand and supply issue, Zoopla says that the mix of home buyers has undergone a series of shifts over the past 18 months.

In the immediate aftermath of the first lockdown in 2020, it was wealthier owners in high value homes that were moving.

In 2021 mortgage availability improved and first-time buyers have been returning to the market, taking the mix of movers back to more normal levels.

Zoopla’s analysts believe that current momentum will outweigh emerging headwinds.

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In today’s report, they say:

“The impact of the pandemic on home buying decisions has further to run, albeit it will be less frenetic.

“This will be supported by the scale of financial gains homeowners have seen in the value of their homes since 2020.

“Primary market momentum catalysts for 2022 stem from the ongoing reevaluation of housing needs, increased equity, and moves in parts of the labour force to more hybrid working.

“Taken together, these factors will continue to bring buyers and sellers into the market.

“Furthermore, the scarcity of homes is set to continue well into 2022, supporting headline house price inflation.

“Headwinds for the market will come from increases in the cost of living, higher levels of inflation and tax increases in 2023.

“The consensus among economists is that higher mortgage rates look to be a certainty in 2022, which in turn will directly impact household buying power.

“Mortgage rates are likely to increase modestly in 2022 ending the year closer to 3%, which would dampen demand for some buyers with mortgage rates still being low by historical standards.

“Any increase in mortgage rates is more likely to impact sales volumes than prices.

“By contrast, existing borrowers are more insulated from higher mortgage rates than they have been in the past and, even if they do go up, competition amongst lenders will remain intense.

“Over 80% of mortgages are on fixed rates, many for five years or more, and stress testing has already ensured they can afford mortgage rates of 7% – significantly higher than where the mortgage market is heading.”

Zoopla executive director Richard Donnell adds: “2021 is set to be a record year for the housing market with the most moves by homeowners since 2007 and nearly £500bn of home sales.

“The impact of the pandemic on the housing market has further to run but at a less frenetic pace.

“We expect the momentum in the market to outweigh some emerging headwinds from higher living costs and the risk of higher mortgage rates.”

By Leah Milner

Source: Mortgage Finance Gazette

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