Inflation set to erode UK house price rises in next five years

Regional variations in house prices  to become more pronounced

House prices in the UK are set to stabilise in 2013 but values will be eroded by inflation, according to the five year residential forecast published today (Friday 09 November) by real estate provider Savills.

Having fallen by an average of 2% this year, the firm forecasts that the average UK house price will rise by just 0.5% in 2013 and a further 1.5% in 2014, with growth totalling 11.5% over the next five years.

But analysts point out that this headline 11.5% average price rise will equate to falls of around 3% after adjustment for inflation.

‘Last year we forecast that UK house prices would fall by 2% and that inflation rather than price falls would continue to strip out value thereafter,’ said Lucian Cook, director of Savills residential research.

‘This year we have seen average values fall in real terms. We now expect the market to show slight nominal growth next year, but remain negative in inflation-adjusted terms until 2016,’ he added.

He explained that the mainstream market continues to adjust to weak economic growth and the long lasting effect of the credit crunch on the accessibility to mortgage debt.

The forecast also says that regional variations are set to become more pronounced. The North East and Yorkshire and Humberside are the only regions expected to show further nominal falls in 2013 and 2014, reflective of a marked North/South divide in sentiment and forecasts for economic recovery.

By contrast, London and the South East mainstream, having underperformed prime markets recently, and Savills predicts small price rises of between 1% and 1.5% in 2013. This will be followed by a stronger 3% to 4.5% uplift in 2014, marking the start of a recovery that will see prices rise by 21% in Greater London over the period to the end of 2017.

‘For real, inflation adjusted house price growth to extend beyond London and the top tiers of the market, we need a sustained and widespread improvement in household incomes fuelled by a stronger economic recovery than we have seen to date,’ said Cook.

‘Over the last five years there have been wide geographical variations in the performance of the housing market, both in terms of price movements and transaction levels. We expect these distinctions to remain as we move to the next stage of recovery in the housing market cycle, when we expect to see a gradual pick up in transaction levels that have been the main casualty of the downturn,’ he explained.

Savills forecasts that by 2017 annual transaction levels will reach almost 1.17 million, up one third from their average in the years since the credit crunch, but still 28% below the pre peak norm.

‘Another significant legacy of the credit crunch has been the divisions created between different buyer groups and tiers of the market, said Cook. He believes the market will continue to be shaped by the current distribution of housing wealth and limited availability of mortgage debt.

Sales volumes in the sub £250,000 price bands will continue to be suppressed by a lack of mortgage activity, and are expected to increase by no more than a third over the next five years. This is still just over two thirds of peak 2007 turnover levels.

Savills estimates that the amount of housing wealth held by the under 35s will fall by 24% to £62 billion over the next five years. Simultaneously, the lower tiers of the market will become increasingly driven by the investment value of property in an expanding private rented sector.

By contrast, at the upper end of the market, where buyers and sellers hold the majority of the UK’s housing wealth, sales of £1 million plus homes will increase by around three quarters, to exceed peak levels by 19% by 2017. This more buoyant market will see the amount of housing wealth held by the over 55s increase by 16% to £1.65 trillion by 2017.

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