Average UK house price growth has exceeded all expectations over the past year, leaving some markets with reduced capacity for further mid term growth, according to international real estate adviser, Savills.
The firm has revised five-year mainstream market forecasts taking account of growth seen in the first half of 2014. The firm’s five-year forecasts for the UK’s prime markets remain as published in November 2013.
The firm now expects average annual UK house price growth to settle at 9.5 per cent this year, ahead of the 6.5 per cent originally forecast. This will be followed by 4.0 per cent growth in 2015 and 25.7 per cent overall in the five years to the end of 2018, just fractionally higher than 25.2 per cent originally forecast.
The most notable changes to the published Savills forecasts are for mainstream London and, to a lesser extent, the corresponding markets in the South and East of England.
So far this year, house price growth in London, the South and East of England has significantly exceeded forecast, with all expected to end the year well into double digits. Price growth in these mortgage-dependent mainstream markets remains high according to the majority of relevant indices, though there are signs that demand is weakening, with lead indicators suggesting a change in sentiment in London.
In London, full year growth is expected to settle at 15.0 per cent against a previously published forecast of 8.5 per cent, despite an anticipated slowing in the second half of the year. While the five-year growth forecast for the period 2014-2018 remains almost unchanged, the rate of recent growth will mean affordability will become stretched as and when interest rates rise.
The markets of the South and East of England were all originally forecast to show marginally higher levels of growth than London in 2014 (+7%), but have in fact underperformed the capital to date. Nonetheless, they too are now expected to end the year in double digit growth.
These markets are still expected to show the strongest five-year growth, outperforming London, as evidence mounts of the flow of buyers and equity out from the capital. The Midlands and the North have the potential to outperform thereafter, as has been seen in previous cycles.
“House price growth in the mainstream market has been underpinned by record low interest rates, rising loan-to-income lending and pent up demand from buyers re-entering the market as the economy and consumer sentiment have improved,” says Lucian Cook, Savills UK head of residential research.
“But these extraordinary rates of house price growth cannot continue in the current, more regulated mortgage environment, particularly in the face of likely interest rate rises.”
Research by the firm suggests that the total current cost of mortgage interest amongst owner-occupiers in Great Britain stands at £33 billion, a figure that is at the same level as a decade ago. However, a 2 per cent rise in interest rates would increase this by £20 billion, adding £2,360 to the average annual mortgage bill across England and Wales and £4,000 in London.
“Higher interest rates would increase the risks in sectors of the market where borrowers have taken on high levels of mortgage debt relative to income, but it is difficult to see this as a catalyst for a wholesale housing market correction, rather we anticipate a slowing of growth, particularly in London and the South,” says Cook.
The Savills forecasts are based on an assumption that average mortgage interest rates (base rate plus lender's margin) will reach 5.0 per cent by the end of 2018, a level that Cook believes would leave room for further price growth at a national level at the end of the forecast period.
