The economy forecast

Housing market

This Forecast in-depth page has been updated with information available at the time of the March 2024 Economic and fiscal outlook.

We forecast two housing variables that are important determinants of parts of our fiscal forecasts: house prices, as measured by the ONS house price index, and the number of transactions that take place, as reported by HMRC. Most importantly, the value of property transactions (i.e. the number times the average price) is the main driver of stamp duty receipts. Some property transactions will also be subject to capital gains tax or inheritance tax. These housing variables also feed into our forecasts for other elements of the economy forecast (such as RPI inflation, mortgage debt and residential investment).

We also produce a forecast of the stock of dwellings across the UK – the ‘housing stock’. This is used to inform our forecast for residential investment and is an input into our forecasts of house prices and property transactions. This is also used to ensure that our fiscal forecast for council tax – which is levied on the stock of dwellings – is consistent with the judgements in our economy forecast.

  House prices

Our forecast for house prices is produced in three stages:

  • First, we produce a short-term forecast for the current and subsequent quarter. This is based on leading indicators of house price inflation, including survey data from Royal Institution of Chartered Surveyors and GfK, and mortgage lending data from the Bank of England.
  • Second, the medium-term path for house price inflation is informed by various models, including an updated version of the house price model described in OBR Working Paper No. 6. Real income growth exerts the greatest influence on real house prices in this model as this is the main driver of the demand for housing, while the supply of housing rises relatively slowly. The model also takes into account other factors – such as demographics, mortgage rates and credit conditions – which are drawn from other parts of our economy forecasts.
  • Third, we add on the effects of new policies announced by the Government that we judge will affect house prices. For example, in November 2017, we raised the level of house prices by 0.3 per cent to account for the stamp duty land tax relief for first-time buyers on properties worth up to £500,000, which we judged would be capitalised into higher house prices.

In our March 2024 EFO, house prices are forecast to fall by around 2 per cent in 2024, slightly under half of the 5 per cent fall we expected in our November 2023 EFO. This smaller fall is mainly due to a decline in market expectations for Bank Rate leading to a lower mortgage interest rate forecast, as well as a quicker recovery in real household incomes.

 

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  Property transactions

Our forecast for property transactions is produced in three stages:

  • First, our short-term forecast is informed by mortgage lending data from the Bank of England and UK finance, and survey indicators published by the Royal Institution of Chartered Surveyors. In a similar manner to the short-term house price forecast, these represent leading indicators for the number of property transactions.
  • Second, in the medium term, our transactions forecast is determined by assumptions about the total number of dwellings in the UK and the average turnover rate (i.e., the ratio of transactions to the number of dwellings). The forecast for the number of dwellings is in turn driven by assumptions about house building that are consistent with our broader residential investment and house price forecasts. The medium-term turnover rate serves as an ‘anchor’ for our transactions forecast, with actual transactions assumed to return to a level determined by this rate over the forecast period. The turnover rate is informed by historical trends and other factors that we expect to influence it over time – including the rising share of dwellings in the private-rented sector, which are typically held for longer than owner-occupied homes.
  • Third, we incorporate any effects of new policies that we expect to influence the level or timing of transactions. For example, if property tax rises are pre-announced, people would be expected to bring forward transactions so that they are taxed at the lower rate before the new policy comes into effect. This is known as ‘forestalling’ and can have big effects, as we described in a 2016 working paper.

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  Housing stock

Our forecast for the housing stock involves three steps:

  • First, we use a simple time-series econometric model to inform our forecast of private sector new building starts. This model relates changes in the level of new housing construction to the turnover rate (i.e., property transactions, described above, divided by the housing stock), interest rates and the recent path of new building starts.
  • Second, we assume that houses take up to two years to complete, so that our forecast for housing completions is equal to the two-year moving average of our forecast for housing starts.
  • Finally, we forecast the total housing stock by transforming private sector completions into net additions to the stock. These also reflect public new housing completions plus the net effect of other increases in the number of dwellings, which include changes in the use of existing buildings (e.g., from offices to housing) and conversions (e.g., from houses to flats, increasing the number of dwellings in a given number of buildings), and reductions in the number of dwellings due to demolitions. To convert our forecast of private completions into the net addition to the housing stock we multiply our completions forecast by a factor informed by the historical ratio between private sector completions and net additions.

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  Working paper

pdf

Working paper No.6: Forecasting house prices

July 10, 2014 – 452.05 KB

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Boxes

Within each of our key publications we include topical ‘boxes’. These self-contained analyses are unique to this publication and tend to cover recent developments in the economy or public finances that complement the main discussion of our analyses.

Economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2020 Economic and fiscal outlook, we adjusted our economy forecast to account for the material increase in departmental spending and tax policy changes on GDP and inflation. In addition to this, our business investment forecast incorporates the reversal of the planned cut in corporation tax, increases in the structures and buildings allowance and R&D tax credits.

The behavioural legacy of the pandemic

Chart 2.A: The impact on se ctors from the behavioural legacy of the pandemic
Covid-19 caused dramatic changes in people's behaviour, which affected where, what and how much economic activity took place. In this box we examined the changes which appeared likely to outlast the pandemic, and the progress the economy had made in adjusting to them.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In the July 2015 Economic and fiscal outlook, we made a number of adjustments to real and nominal GDP, the labour market, inflation, business and residential investment, and the housing market.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our December 2013 Economic and Fiscal Outlook, we adjusted our inflation forecast to reflect changes in fuel duty.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2013 Economic and Fiscal Outlook, we made adjustments to our forecasts of real GDP, business investment and inflation

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2014 Economic and Fiscal Outlook, we made adjustments to inflation and business investment.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2015 Economic and Fiscal Outlook, we made adjustments to nominal GDP, inflation and North sea production.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In the 2015 Autumn Statement and Spending Review, we made a number of adjustments to real and nominal GDP, the labour market, inflation, and the housing market.

Bank deposits, mortgage lending and the housing recovery

Bank deposits, mortgage lending and the housing recovery
In 2013, households’ balances in ‘time deposit’ accounts (savings with fixed maturity) fell by £36 billion. This box outlined possible reasons for this by exploring the wider household savings behaviour. The cumulative change in annual deposit flows showed rapid increases in 'sight deposits'. This was possibly explained by narrowing spreads between 'time' and 'sight' deposit interest rates or normalisation of household investment behaviour. Changes in annual mortgage flows also suggested that revival of housing market activity could have been responsible for switching between deposit types. The ability of households to shift very large deposit balances over relatively short timeframes was one reason why the impact of savings and pensions measures discussed in Box 3.3 of the same EFO was subject to considerable uncertainty.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our December 2014 Economic and Fiscal Outlook, we made adjustments to property transactions and residential investment in light of reforms to stamp duty land tax

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our October 2018 Economic and fiscal outlook, economy forecast adjustments included the effects of looser fiscal policy on GDP and inflation, the effects of capital allowances on business investment, the effects of tax policy changes on inflation and the effects of the extension of the Help to Buy scheme on the housing market.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our November 2016 Economic and Fiscal Outlook, economy forecast adjustments included the effects of looser fiscal policy on GDP and the effects of tax policy changes on inflation.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our December 2012 Economic and Fiscal Outlook, we made adjustments to our forecasts of real GDP, inflation and property transactions

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our November 2017 Economic and fiscal outlook, economy forecast adjustments included the effects of looser fiscal policy on GDP, the effects of tax policy changes on inflation and the effects of stamp duty relief for first-time-buyers on house prices.

The challenges faced when forecasting SDLT receipts

Stamp duty land tax (SDLT) is one of the more volatile sources of receipts. In our 2016 Forecast evaluation report, this box identified a number of reasons why forecasting SDLT receipts is challenging, including the concentration of receipts in a small proportion of expensive properties and the effects of significant policy changes.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our November 2011 Economic and Fiscal Outlook, we made adjustments to our forecasts of inflation and property transactions.

Turnover in the housing market

Turnover in the housing market
Residential property transactions fell sharply in 2008 as the availability of mortgage finance fell and stricter credit standards were introduced. This box explored recent trends in transactions and discussed our medium-term forecast, which is determined by our projection of average rate of turnover in the housing market. In our March 2012 forecast we expected the level of transactions to remain around 20 per cent below the pre-crisis peak by the end of the forecast period.

Pension flexibility and the long-term public finances

At Budget 2014, the Government announced a number of tax measures that increase the flexibility with which individuals can access their defined contribution (DC) pension assets. This box considered the effect of two possible sensitivities. First, the possibility that there would be more money flowing into the housing market, and second, that people could spend their pension pots relatively early in retirement, leading to greater reliance on income-related benefits.

Household debt and the household balance sheet

Household debt and the household balance sheet
Our November 2011 forecast implied that households would take on around £480 billion of additional debt over the forecast period. This box discussed the implications of this for the household balance sheet, noting that a large part of the increase in household debt reflects borrowing for the purchase of assets. The box also discussed the downward revision in our household debt forecast since our previous EFO, which was largely accounted for by a combination of higher saving and a weaker housing market outlook.

The impact of the reforms to the taxation of property transactions

The impact of the reforms to the taxation of property transactions
The Government announced substantial reforms to the residential stamp duty land tax (SDLT) system at Autumn Statement 2014. This box explored how the tax system changed and how these reforms were costed.

A new tax relief for first-time buyers

A new tax relief for first-time buyers
In Autumn Budget 2017, the Government announced the introduction of a permanent stamp duty land tax (SDLT) relief for first-time buyers. This box considered the effects of a previous temporary relief for first-time buyers and how the new permanent relief was expected to affect tax receipts and house prices.