AFFORDABILITY, NOT BREXIT, THE MAJOR FACTOR FOR THE UK HOUSING MARKET
Savills forecasts for UK mainstream market 2019-23:
- UK house prices to rise 14.8% from 2019-2023, with significant regional variation
- Ranging from 21.6% in the North West to single digit growth in London (4.5%), SE and East (9.3%)
- London’s prime market will perform more strongly, with prime central London +12.4%
- Transactions to stabilise, with first time buyer and cash buyer numbers most resilient
- Rents to rise 13.7% over next 5 years; London rents +15.9%
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, with the Midlands, North and Scotland expected to see the strongest increases, according to new forecasts from international real estate adviser, Savills.
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.
Between 2019 and 2023, UK house prices will rise an average 14.8 per cent, Savills projects, ranging from 21.6 per cent in the North West to single digit growth in London and the South, far the strongest performers since the downturn, due to affordability constraints. 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 were much slower to recovery post GFC and some have only recently returned to peak values. House prices are therefore more affordable, with greater capacity for loan to income ratios to increase.
Lucian Cook, Savills head of residential research, says: “Brexit angst is a major factor for market sentiment right now, particularly in London, but it’s the legacy of the global financial crisis – 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.”
|Mainstream house price forecast||2019||2020||2021||2022||2023||5 Year (2019-2023)|
|Yorkshire & Humberside||2.5%||5.5%||4.0%||3.0%||4.0%||20.5%|
|East of England||0.0%||2.0%||2.5%||2.0%||2.5%||9.3%|
Source: Savills Research
Transactions, rather than house prices, are often seen as the ultimate measure of market strength. Sales volumes have fallen only -6.9 per cent since the Brexit vote to 1.145 million, demonstrating the resilience of the UK housing market, Savills says.
The firm expects this figure to decrease by just 1.0 per cent 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 per cent. This will add to upwards pressure on rents (see below), particularly in London, as investors look to lower value, higher yielding markets.
London house prices have risen by 72 per cent over the past ten 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 (58 per cent higher than the UK average). Even with borrowing at over four times that income, these households still need a deposit of £123,000.
Small falls (-2.0%) are expected in London’s mainstream market next year, before values bottom out in 2020 and tick up steadily from 2021. Price growth over the next five years is forecast to total 4.5 per cent.
The prime London markets are less dependent on mortgage borrowing and will outperform the mainstream, Savills says. The UK capital is expected to remain an attractive place to live, work and own residential assets, supporting 12.4 per cent price growth in prime central London by the end of 2023.
At this point in the cycle, the highest price growth is expected in the lower value markets much further from the capital, which have seen nothing like the 10-year price rises seen in London – just 1.9 per cent in the North and 5.8 per cent in Scotland.
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 per cent to 21.6 per cent 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.
Wales will 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 per cent and 7.0 per cent over the past year, respectively.
Transactions - by buyer group:
Transactions have fallen from 1.619 million in 2007 to around 1.145 million this year, but are forecast to remain stable over the next five years, though the market mix has changed.
Cash remains king and cash buyers now account for almost a third of all sales (31%). The bank of mum and dad has provided important support to first time buyer numbers and, judging by receipts from the three per cent surcharge for additional homes, cash is also an important component of investment demand, Savills says.
Mortgaged first time buyers, the only buyer group to have expanded since 2007 – from 359,000 to 370,000 this year – continue to be supported by Help to Buy and the bank of Mum and Dad. Numbers are expected to remain robust despite the prospect of a less generous, more targeted Help to Buy, with a fall of just -2.7 per cent anticipated by 2023.
Mortgaged home mover numbers have fallen dramatically since 2007 as existing home move home less frequently. Numbers are down from 653,000 to 370,000, but having adjusted for stress testing of borrowing, are expected to remain constant over the next five years.
Buy to let buyer numbers will continue to come under pressure. Stamp duty and mortgage-interest tax relief changes have led highly leveraged investors to rationalise portfolios or pay down debt.
Rental growth to outpace income growth:
Rental growth is expected to track house price growth, averaging 13.7 per cent over the next five years. 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 per cent.
“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 concludes.
|2019||2020||2021||2022||2023||5 year compound|
|Bank base rate*||1.0%||1.5%||1.8%||2.3%||2.8%||N/A%|
Source: Savills Research, *Oxford Economics