UK house prices are set to rise broadly in line with incomes over the next five years, but the traditional North/South divide will turn on its head, according to new outlook forecasts.
While overall prices are predicted to rise by 14.8% in the UK from 2019 to 2023, the Midlands, the North and Scotland are expected to see the strongest increases, according to the analysis from international real estate adviser Savills.
But Brexit will continue to impact sentiment over the short term, particularly in London and its commuter belt, but local market affordability is expected to determine the pattern of price growth over the longer term, the firm says.
The forecast also suggests that the range of growth could be from 21.6% in the North West to single digit growth in London and the South, But values in the capital’s prime market will perform much more strongly, given price adjustments already seen in those market since 2014, the firm says.
Other regions have been much slower to recover since the global economic downturn and some have only recently returned to peak values so house prices are therefore more affordable, with greater capacity for loan to income ratios to increase, it also points out.
‘Brexit angst is a major factor for market sentiment right now, particularly in London, but it’s the legacy of the global financial crisis, with mortgage regulation in particular, combined with gradually rising interest rates that will really shape the market over the longer term. That legacy will limit house price growth, but it should also protect the market from a correction,’ said Lucian Cook, Savills head of residential research.
A breakdown of the figures show that over the five years the strongest price growth is likely to be 21.6% in the North West, followed by 20.5% in Yorkshire and Humberside, and 19.3% in the East Midlands, the West Midlands and Wales.
It also predicts five year growth of 18.2% in Scotland, 17.6% in the North East, 12.6% in the South West, 9.3% in both the South East and the East of England, and 4.5% in London.
The report points out that sales, rather than house prices, are often seen as the ultimate measure of market strength and transactions have fallen only 6.9% since the Brexit vote to 1.145 million, demonstrating the resilience of the UK housing market.
The firm expects this figure to decrease by just 1% over the next five years but a continued rebalancing of the composition of the market is expected, with mortgaged buy to let investor purchases falling by 23%. Savills says that this will add to upwards pressure on rents, particularly in London, as investors look to lower value, higher yielding markets.
The analysis also reveals that London house prices have risen by 72% over the past 10 years, well ahead of any other region. The average home buyer with a mortgage now pays just under £429,000 and has a household income of almost £76,000, some 58% higher than the UK average. But even with borrowing at over four times that income, these households still need a deposit of £123,000.
However, the prime London markets are less dependent on mortgage borrowing and will outperform the mainstream and the capital is expected to remain an attractive place to live, work and own residential assets, supporting a 12.4% price growth in prime central London by the end of 2023.
The Midlands, the North of England, Yorkshire and Humberside, Scotland and Wales all have the capacity for borrowing to increase relative to incomes, even allowing for higher interest rates, and this will support price growth ranging from 17.6% to 21.6% across these regions.
Key regional economies, most notably the metros of Manchester and Birmingham, have the capacity to outperform their regions attracting both local and investor buyers, the report says while Wales is expected to perform in line with the Midlands as it has done in previous cycles, but it is a hugely diverse market. There may be increased housing demand crossing over from Bristol once the Severn bridge tolls are abolished.
Scotland, which has only recently returned to pre credit crunch peak, is performing strongly, particularly Edinburgh and Glasgow, which have seen prices rise 8.9% and 7% over the past year, respectively.
Rental growth is expected to track house price growth, averaging 13.7% over the next five years and the report says that tightening access to mortgage finance and limited social housing supply is driving demand for privately rented homes at all price points. This is particularly true in London, where rents will rise by 15.9%.
‘Until the market sees a significant injection of build to rent stock, rental demand will outstrip supply and rents will rise. Investor buyers requiring borrowing are expected to focus on higher yielding markets and this will put further upwards pressure on rents in some of the most expensive rental locations,’ Cook added.