It won’t come as a surprise when I repeat my forecast that house price growth will slow, at least a little, as we progress through 2022, creating a house price gap.
The rising cost of living, forthcoming energy price rises and now the heartbreaking news from Ukraine are all sapping a little confidence amongst would-be buyers, meaning demand could inevitably slow. So what do I mean by a house price gap? Let’s take a look.
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Supply and demand
At the same time the supply of homes on the market – which has been below average for the past year – is set to rise, as many estate agents say they’ve had an increase in invitations to give market appraisals on homes that are likely to go on sale this spring.
This doesn’t necessarily represent bad news.
After all, annual price increases of 11.2 per cent, as reported by Nationwide last month (February) cannot continue indefinitely, so a gradual slowdown is in everyone’s interest to avoid creating a bubble and a price crash.
But what you will notice is a widening of the so-called price gap: this is the difference between the average asking price of a home on sale and the price it eventually sells for.
The narrow house price gap in 2021
The price gap was very narrow in 2021 and at the start of this year. In fact, Rightmove said that in January homes sold for an average of 98.1 per cent of their asking price. That’s a ‘price gap’ of just 1.9 per cent.
That’s remarkable because as recently as early 2020, as the pandemic was starting, the average gap was 3.6 per cent, and back in 2018 it was nearer to 5.0 per cent.
Why does the gap change?
Last year the gap was narrow because there were many more buyers than sellers, so the purchasers competed with each other.
Often they put in rival bids win the same property, with each offer slightly higher than the previous one, thus making the ultimate sale price much closer to the asking figure, or sometimes even beyond it.
Indeed, in June 2021 some 37 per cent of homes actually sold at more than the asking price.
This was highly unusual; it was at the height of the stamp duty holiday and was when many buyers were selling expensive London and south east properties and were able to buy larger homes for less money in other parts of the country. They, therefore, felt able to make spectacularly high offers for property.
Those days are slowly passing, however.
Managing sellers’ expectations
Now, with the likelihood of more homes on sale and some buyers sitting on their hands to see what happens to the economy, supply and demand are coming into equilibrium.
I anticipate that there will be less competition between buyers as spring and summer arrive, so offers and therefore the ultimate sale prices will be slightly lower.
This subtly changing balance between supply and demand means that vendors in particular need to manage expectations during 2022.
Whereas last year there was a clear sellers’ market, this year the first offers from would-be buyers are likely to be a little below the asking price. Therefore estate agents acting for the sellers must work harder with skilful negotiations to extract the maximum from a purchaser.
Likewise ‘time on market’ – the period between a home being listed for sale on an agent’s website and an offer being accepted by the seller – is set to stretch a little longer this year.
No reason to defer your plans
None of this is meant to ring alarm bells; it is the inevitable slowing after an unusually frantic period for a housing market.
For buyers, it means there’s more choice and therefore some scope to negotiate a house price: elsewhere on Move iQ I set out steps to take before making an offer on a home in normal market conditions.
And for sellers, prices are still high and growing – just less rapidly than before.
Last Updated: May 26th, 2022