UK house price growth to slow



UK house price growth looks set to slow in the coming months as as a result of the cost-of-living crisis, according to Savills.

The estate agency says that affordability pressures will leave many vendors with little alternative but to be willing to negotiate on asking prices, as fewer buyers and greater housing supply hit the market.

Residential property prices are forecast to rise 7.5% this year, Savills estimated, having previously expected growth of 3.5%. Though Savills anticipates costs to fall ‘modestly’ next year.

Affordability pressures are expected to substantially moderate further price growth as buyers become more budget-conscious and demand progressively eases.

The combination of extremely strong price growth over the past two years (+20% to the end of April), rising interest rates and a cost of living squeeze, will combine to limit the capacity for growth over the following four years. Savills now projects that price growth in the next four years (2023-2026) will average a total of 5.1% across the UK as a whole, with markets in the North of England growing most strongly.

Table 1: Mainstream House Price Forecasts and Economic Assumptions May 2022

2022

2023

2024

2025

2026

Total

Average UK House Price Growth

+7.5%

-1.0%

+1.5%

+2.0%

+2.5%

+12.9%

Residential transactions

1,310,000

1,140,000

1,090,000

1,090,000

1,090,000

5,720,000

Loan-to-income ratio

3.91

3.73

3.70

3.68

3.66

Nominal GDP growth*

5.2%

3.3%

4.2%

3.8%

3.7%

21.9%

Bank Base Rate*

1.50%

1.50%

1.75%

1.75%

1.75%

Inflation (CPI)*

6.8%

1.1%

1.2%

1.5%

1.7%

12.8%

Source: Savills and Oxford Economics (figures year to Q4)*

The top end of the market, described as ‘prime’ (broadly the top 5% to 10% by value), will also outperform the mainstream market, Savills says, due to a deep seam of equity and the fact wealthier buyers will be less impacted by the current economic conditions and rising interest rates.

Lucian Cook, head of residential research at Savills, said: “A lack of supply and strong buyer demand fuelled by the experience of the pandemic has turbocharged house price growth over the past two years, despite growing economic headwinds.

“This, combined with the rising cost of that borrowing and cost of living pressures, leaves less capacity for further price growth, especially within markets where borrowing is high relative to incomes..

“As a result, we have downgraded our projections for 2023-2026, and as part of this, anticipate modest price falls next year as the heat comes out of the housing market. But as things stand, we see nothing that points to a price correction. Affordability will be squeezed at the point of purchase, but interest rates are forecasts to remain low within an historical context and strong employment levels should serve to protect existing home owners.

“The key variables in our forecasts are the path of interest rates and whether the Bank of England follows through on recent proposals to relax stress testing of mortgage affordability. The removal or relaxation of the stress test could improve the outlook for prices. However, additional capacity for growth would be dependent on the precise terms of reform and how far lenders are prepared to push loan to income multiples in a higher interest rate environment,” continues Cook.

Savills has based its forecasts on latest projections from Oxford Economics. This assumes that the Bank of England base rate will not exceed 1.75% by the end of 2026, with the annual rate of inflation falling rapidly in 2023.

“If interest rates rise higher than is currently being projected, capacity for price growth could be quickly eroded,” concludes Cook.

Regional outlook

Savills continues to expect value growth to be strongest in the North, Wales and the Midlands, with slower growth in London and the South. Given unequal affordability squeezes seen across the country, prices are expected to grow most rapidly in areas where total value growth since the peak of the market (2007/8) has been the lowest.

“The gap between the average household and the average purchase price has widened over recent years – most significantly in London and the wider South, where price growth has been highest in the last 15 years and affordability pressure is therefore greatest,” says Lawrence Bowles, director of residential research at Savills.

“As prices have risen, the market has become increasingly confined to more affluent households, as those on lower incomes have been priced out of the market. This sets a precedent for what might happen more widely. In the North however, prices have not risen as significantly and affordability is not as stretched. Loan to income ratios have remained lower, meaning there is greater capacity for borrowers to take on more debt before an affordability ceiling is reached. Price growth is likely to be stronger as a result.”

Table 2: Mainstream* house price forecasts 2022-2026

2022

2023

2024

2025

2026

5-year total

North West

10.0%

-0.5%

2.0%

2.5%

3.5%

18.4%

Yorkshire and The Humber

10.0%

-0.5%

2.0%

2.5%

3.5%

18.4%

North East

9.0%

-0.5%

2.0%

2.5%

3.5%

17.4%

Wales

10.0%

-1.5%

2.0%

2.5%

3.5%

17.2%

East Midlands

8.5%

-1.0%

2.0%

2.5%

3.0%

15.7%

West Midlands

8.5%

-1.0%

2.0%

2.5%

3.0%

15.7%

Scotland

8.5%

-1.0%

2.0%

2.5%

3.0%

15.7%

South West

7.5%

-1.5%

1.5%

2.0%

2.5%

12.4%

South East

6.0%

-1.5%

1.0%

1.5%

1.5%

8.6%

East of England

6.0%

-1.5%

1.0%

1.5%

1.5%

8.6%

London

3.5%

-1.0%

0.5%

1.0%

1.0%

5.0%

UK

7.5%

-1.0%

1.5%

2.0%

2.5%

12.9%

Source: Savills research, ONS

 

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