House prices are expected to fall next year due to the end of the stamp duty holiday and a hit to household incomes when the furlough scheme draws to a close.
The Office for Budget Responsibility said that the level of house prices remains around 17 per cent lower over the five-year forecast period, compared to March predictions.
The UK housing market has boomed since the first lockdown restrictions were eased, due to a release in pent-up demand and the stamp duty holiday.
However, the stamp duty holiday will end in March and the coronavirus job retention scheme will also close next year, which will cause a spike in unemployment and lower household incomes.
The OBR report said: “House prices fell briefly as the pandemic struck, but recent indicators suggest they have subsequently recovered quite strongly.
“This follows the easing of public health restrictions and the stamp duty holiday for residential property transactions that took effect on 8 July 2020.”
However it added: “House prices are expected to fall back in 2021, driven by end of the stamp duty holiday and the hit to household incomes from the labour market adjustment that we assume will follow the end of the Coronavirus Job Retention Scheme.
“Despite a steady recovery from 2022 onwards, the level of house prices remains around 17 per cent lower at the forecast horizon compared to our March forecast.”
It comes as chancellor Rishi Sunak announced in today’s spending review that the OBR has forecast that the UK economy will shrink 11.3 per cent this year.
Government borrowing is expected to soar to £394bn, due to coronavirus support measures.