Uncertainty and lending constraints to slow 5 year house price growth and limit house buying activity. Rents to keep pace with wages, but landlords feel the squeeze

02 November 2017

Average UK house price growth is expected to slow to 14 per cent over the next five years, but there will be marked differences between and within regions.  Projections range from an average 18 per cent increase in the North West to just 7per cent in London between 2018 and 2022, though the capital’s prime markets will show stronger growth, according to new forecasts from international real estate adviser, Savills.

Key numbers:

  • 2018-2022 average UK house price growth forecast to total +14%
  • Range to be +18.1% in North West to +7.1% as a London average
  • Prime London markets to recover more strongly – prime central London +20.3%, other prime London +10.2%
  • Transactions to remain low, with new buy to let buyers down by a quarter; cash buyers to remain largest buying group
  • Rents to keep pace with wage growth, with London showing biggest increases at 17%
  • Landlords to focus on yields, putting focus on urban locations outside London

Market to slow next year before ticking up in 2019-20

UK house price growth is expected to slow next year as uncertainty weighs on sentiment, Savills says.  A return to growth is expected in 2019-20, assuming employment, wage and GDP growth swing back towards trend levels, though this will be tempered by interest rate rises.

“Uncertainty over what Brexit means for the UK economy and how it will impact household finances will increasingly act as a drag on house prices,” says Lucian Cook, Savills head of residential research.  “There is capacity for growth once we have greater clarity, but this will be constrained by rate rises and the corresponding ability to get mortgage debt, particularly in London and other higher value locations.

“Mortgage regulation, introduced in 2014, is likely to show its hand as interest rates rise.  But by restricting the amount people can borrow, it will take the heat out of the market and so reduce risk now and in the future."

Mainstream house prices – 5 year forecasts:

 

2017

2018

2019

2020

2021

2022

5 year

2018-2022

UK AVERAGE

2.0%

1.0%

2.5%

5.0%

2.5%

2.5%

14.2%

North West

3.0%

1.5%

3.5%

6.0%

3.0%

3.0%

18.1%

North East

2.5%

1.5%

3.5%

5.5%

3.0%

3.0%

17.6%

Yorkshire & Humberside

2.0%

1.5%

3.5%

5.5%

3.0%

3.0%

17.6%

Scotland

2.5%

1.5%

3.5%

5.0%

3.0%

3.0%

17.0%

Wales

2.5%

1.0%

3.0%

5.0%

3.0%

3.0%

15.9%

East Midlands

5.0%

1.0%

3.0%

5.0%

2.5%

2.5%

14.8%

West Midlands

5.0%

1.0%

3.0%

5.0%

2.5%

2.5%

14.8%

South West

5.0%

1.0%

3.0%

4.5%

2.5%

2.5%

14.2%

East Anglia

2.0%

0.5%

2.5%

4.0%

2.0%

2.0%

11.5%

South East

2.0%

0.5%

2.5%

4.0%

2.0%

2.0%

11.5%

Greater London

-1.5%

-2.0%

0.0%

5.0%

2.0%

2.0%

7.1%

Source: Savills Research (Note: These forecasts apply to average prices in the second hand market.  New build values may not move at the same rate.)

In London, average house prices – at £479,100 in August 2017, according to the Land Registry - are 12.9 times the average individual’s earnings.  The market has therefore become increasingly accessible only to more affluent, dual-income households, which will restrict potential future growth in the capital, and in turn act as a drag on its commuter belt.  

Beyond the Home Counties, house prices have risen more in line with incomes, leaving affordability far less stretched.  The house price to income ratio in the North West is a much more modest 5.6.  Coupled with a robust economic outlook and strong employment growth centred on Manchester, this will underpin the region’s housing market.

London in more detail

After rising by 70 per cent in the past decade, 3.4 times the UK average, house prices in London are expected to fall by -2 per cent next year, before levelling off in 2019.  Net five year growth of 7.1 per cent is forecast across the five years.

It is the city’s mainstream market that looks particularly stretched compared to other locations: first time buyer deposits are now 3.9 times the UK average, at £99,753; the average stamp duty bill, at £25,703, is 3.1 times that paid across England; and the average mortgaged home mover income is £91,329, 66 per cent higher than across the UK as a whole. 

“London’s housing market has been pushing up against the limits of mortgage regulation and affordability for some time,” says Lawrence Bowles, Savills research analyst.  “The Brexit vote was the tipping point that slowed price growth.  Weakened sentiment combined with expected interest rate rises now point to small, short term price falls next year.

“Greater economic and political certainty should trigger a return to growth in 2020, though this will be capped by borrowing constraints as gradual increases in the cost of mortgage debt impinge on affordability.”

Prime London stronger outlook

Like other regions, however, London’s housing market is very diverse.  In particular, the rarefied prime central London market operates according to a different set of rules, with different drivers. Having seen double digit falls in value since the reform of stamp duty, Savills prime market forecasts (released in September) anticipate stronger five year growth for this market segment, at 20.3 per cent, assuming London retains its leading global city status. 

The more domestic, equity rich other prime London markets are also expected to outperform the mainstream, with growth forecast to total 10.2 per cent.

Low transactions to continue

Total transactions in the UK housing market are expected to dip before gradually returning to around 1.2 million by the end of the five year forecast period - still around half a million below their pre credit crunch level.

People will continue to trade up the housing ladder less often as they struggle to accumulate the equity and additional borrowing required, and first time buyers will remain heavily reliant on the Bank of Mum and Dad or government initiatives such as Help to Buy.

Cash buyers have become more dominant and this trend will continue.  They now account for some 34 per cent of all house purchases, and 45 per cent of the total value of transactions.  Although expected to become more price conscious, they will continue to be the largest buyer group, as others struggle to access the market. 

 

 

The changing profile of mainstream market buyers:

 

2017

2018

2019

2020

2021

2022

Change 2018-2022

Mortgaged first time buyers

360,000

360,000

370,000

370,000

380,000

380,000

6%

Mortgaged Home Movers

360,000

350,000

340,000

330,000

340,000

350,000

-3%

Mortgaged buy to let

75,000

65,000

65,000

60,000

55,000

55,000

-27%

Cash   buyers

400,000

360,000

380,000

410,000

420,000

425,000

6%

Total

1,195,000

1,135,000

1,155,000

1,170,000

1,195,000

1,210,000

1%

Source: Savills research

Mortgaged buy to let investor numbers are forecast to fall most dramatically, down -27 per cent, to just 55,000, by the end of 2022 as tighter mortgage regulations, increased stamp duty charges and the phasing out of mortgage interest relief combine to restrict buy to let investor activity. 

“We have seen the earliest signs that some mortgaged buy to let investors may be selling stock,” says Cook. “Those entering the market will be looking very carefully at yields and that will put the spotlight on urban markets outside the capital.”

Rents to rise in line with incomes

Rental growth is forecast to exceed house price growth in London.  This market has had to accommodate a glut of stock after investors scrambled to buy before the 3% stamp duty surcharge on additional homes came into effect on 1 April 2016.  Asking rents fell 3.2 per cent in the year to June 2017, compared to a 1.9 per cent rise across England and Wales. 

Rents in the capital have now stabilised.  Compound growth of 17 per cent is projected from 2018-2022, in line with wage growth but ahead of inflation.

Withdrawal of mortgage interest tax relief will push investors from London to higher yielding regional locations. Increased rental supply there will dampen potential rental growth beyond the capital.

“The rental outlook is strongest in regional cities that attract employees from high value sectors such as professional services, technology, and finance,” says Bowles.

Forecasts for mainstream rents:

 

2017

2018

2019

2020

2021

2022

5 year

2018-2022

UK

0.0%

2.5%

2.5%

3.0%

3.5%

3.5%

15.5%

London

-3.0%

3.0%

3.0%

3.5%

3.5%

3.0%

17.0%

UK excl London

2.0%

2.0%

2.0%

3.0%

3.5%

3.5%

15.0%

Wages

2.0%

3.0%

3.0%

3.0%

3.5%

3.5%

17.0%

CPI

3.0%

2.0%

1.5%

2.0%

2.0%

2.0%

9.5%

Source: Savills research, Oxford Economics

 
 

Key Contacts

Lucian Cook

Lucian Cook

Director
Residential Research

Savills Margaret Street

+44 (0) 20 7016 3837

 

Sue Laming

Sue Laming

PR Director
Press Office

Savills Margaret Street

+44 (0) 20 7016 3802