Lucian Cook, Savills head of UK residential research, said:
“With strong positive sentiment, we expect prices to rise by 17% in the next three years alone. But total five year house price growth will be capped by earnings growth, given the likelihood of interest rate rises that will erode mortgage affordability.”
Analysis from Savills suggests that the strongest five year growth will occur in the South and East of England, with all of the regions outperforming London over the next five years.
Cook added:
“Though we expect London to continue to outperform in the short term, it is unlikely to continue to do so indefinitely. The capital has already been the strongest performing region of the UK since mid 2005 during which period prices have risen by 37%, compared to just 8% across the country as a whole. As a consequence, the gap between London prices and the rest of the UK, including the South East, is as wide as it has ever been.
“As confidence improves, buyers are likely to look to markets beyond London that offer better relative value, though it will be later in the cycle before the North feels this benefit.”
Savills also expects transaction levels in the market to increase by 27% over the five years, though this will leave them 24% below a fully functioning market.
“Cash buyers currently account for around one third of the whole market, their numbers being within 16% of the 15 year average prior to the credit crunch,” says Cook. A meaningful increase in transactions is likely to be dependent on improvements in mortgage lending.
“In the short term Help to Buy is likely to increase transaction levels by around 12% per annum over its three year lifespan, but we expect transactions to fall back once the scheme ends and for house price growth to occur against the backdrop of continued increasing levels of private renting.”
Cash is expected to remain the dominant source of funding over the next five years meaning that areas with high levels of in-built housing wealth will be the first and fastest to recover.
As a result, the upper parts of the mainstream market will drive the next phase of recovery. This will favour areas such as Woking over Slough, Bath over Gloucester, Solihull over Coventry and York over Leeds.
Cook concluded:
“We see no evidence of an imminent housing bubble and think it an unlikely prospect. For a bubble to occur we would need to see five year price rises of 35% to 40% and/or mortgage interest rates of around 7%, which seems improbable.”
“On balance, an earnings led price recovery remains the most likely outcome, with a continued squeeze on mortgaged owner occupation continuing to limit the recovery in market turnover and house price growth potential.”
