We forecast two key housing variables: average house prices, as measured by the ONS house price index, and the number of transactions which take place, reported by HMRC. As well as feeding into our forecasts for other elements of the economy forecast (such as RPI inflation, mortgage debt and residential investment), these variables are important determinants of parts of our fiscal forecasts. 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.
Our forecast for house prices is produced in three stages:
- First, we produce a short-term forecast for the first quarter. This is based on leading indicators of house price inflation, including survey data from Royal Institution of Chartered Surveyors and GfK, and mortgage data from the Bank of England.
- Second, we assume a medium-term relationship between house price inflation and average earnings growth. Taking into account wider macroeconomic conditions, such as housing supply, credit conditions and the direction of macroprudential policies, we judge that house price inflation towards the end of our forecast will settle around 1 percentage point above our forecast for average earnings growth. We use judgement to determine the path between the short-term indicator-based forecast and this medium-term assumption, which will typically be informed by our house price model and related parts of our economy forecast – in particular the expected profile of earnings growth.
- Third, if there are new policies announced by the Government that we judge will affect house prices, we add on these effects. For example, in March 2016, we raised the level of house prices by 0.3 per cent to account for the introduction of lifetime ISAs, which we judged would add to demand for housing without affecting supply.
As with our house price forecast, forecasting property transactions over five years is done in three stages:
- First, our short-term forecast is informed by mortgage approvals data from the Bank of England and the British Bankers’ Association, 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.