Yolande Barnes, head of residential research, Savills, said:
“In announcing our 2009 forecasts we stated that the prime central London markets would lead the recovery and that the bottoming out of these markets would be the ‘key indicator that the worst is over for the entire residential sector’. We are now past that point meaning that we can forecast five year price growth with some certainty even if it is more difficult to forecast the short term impacts of supply and demand on values over the next twenty four months.”
“The price growth of 2009 has taken most market commentators by surprise and few, if any, expected demand from equity rich buyers to return so strongly and so quickly, particularly in the mainstream. It is the imbalance between low supply and high cash-driven demand that has driven prices upwards. In mainstream markets, therefore, conditions are currently far from normal.”
Correspondingly, over the course of 2010 prices are expected to soften as pent up demand from cash-rich buyers will begin to be satisfied and stock shortages will ease. This could result in a brief period of headline-grabbing price falls, up to -6.6%, around the mid year point, with modest growth (+2.7%) in 2011.
However, the longer term prognosis is for a return to price growth in mainstream markets, with the average UK house price values expected to rise by 27% over the period 2012 to 2015. This would leave the average UK house price just under £200,000, over 7.5% higher than at the peak of the market towards the end of 2007.
The prime markets, broadly the top 5% to 10% of property, are less mortgage reliant. Owners have a greater equity cushion and as a result these markets are less susceptible to the drag of a slow economic recovery. Therefore, whilst a small fall in values of 1.0% is forecast next year, this is expected to be followed by a much earlier return to sustained price growth.
Prime central London price growth is expected to total around 18% and 35% over the next 3 years and 5 years respectively, with equivalent figures of 14% and 30% in the prime regional and country house markets.
Recent price movements have been exacerbated by a lack of stock. However, we expect more stock to come to market in 2010 just as the pent up demand from cash and equity rich buyers becomes sated. There are very few signs that mortgage markets will ease over the next 12 months and there is a significant risk that mortgage dependent buyers will be unable to return to the market in sufficient numbers to maintain current price levels.
This could create a void in the mainstream market (and the trigger could be a fall in market activity around the election) that will cause a hiatus in the market recovery.
Lucian Cook, director, residential research at Savills, says:
“In the short term, we are facing events with the potential capacity to discourage house purchases. The uncertainty preceding an election, the prospect of public spending cuts, higher taxes, continuing mortgage rationing, further unemployment, possible stock market correction, inflation or future interest rate rises, all have the potential to impact the mainstream, even if the precise timing of such impacts is difficult to pinpoint.”
However, any price falls in the coming year will be contained by the relative affordability of housing which is firmly underpinned by the current low mortgage interest rates. As a result, mainstream markets are forecast to fall by no more than -6.6% in 2010, and at no point will they reach the lows seen in the first quarter of 2009.
In mainstream markets with higher levels of equity (that are correspondingly less reliant on the mortgage markets) price falls in 2010 will be lower, followed by much stronger growth in 2011, mirroring the prime trend. Regionally this is likely to mean that the south of the country will witness a less pronounced ‘W’ effect with the second leg of house price growth coming much earlier.
Cook says:
“We could really see the emergence of a polarised mainstream market, with sharp regional and localised divergences between areas with high levels of equity and job security, and those which are more highly geared.
“The gap between the equity rich and the equity poor is likely to be an ongoing feature of the market, both because of a long term change in the capacity of lenders to provide mortgage finance and the prospect of greater emphasis on mortgage affordability proposed by the FSA.”
By contrast the cash-driven prime markets are largely disconnected from lending conditions and show far lower risk of significant falls next year, with superior growth prospects over the longer term.
A rapid improvement in sentiment has led to some very significant growth figures over the past six months, with reports of peak prices being achieved for exceptional properties. The release of pent up demand that has fuelled growth of 8.4% in prime central London in the six months to the end of September, will have a decreasing influence on the markets in 2010.
It is unlikely that this demand will continue at the current pitch but the inevitable return of bonus money, even if it at a less significant level than in the peak years of 2005 and 2006, and the continued injection of equity from overseas will help to plug the gap, thus underpinning current values.
Both of these drivers are likely to be strongest in the markets of London and the South East, with a delayed ripple effect occurring in other prime regional markets. As a result, the Savills forecast for both the prime central London and prime regional markets is for a correction of no more than -1.0% in 2010.
Says Barnes:
“With a spring election in the offing, the effect of changes in both domestic and non-dom tax changes yet to be felt, and the jury still out on whether the recovery in global investment markets is sustainable, there are still uncertainties in the market. A self-sustaining period of house price growth could still be some way off, but the market has seen the bottom and greater price stability is expected.
“Our forecast definitely augurs against short-term speculation in housing towards more medium and long-term holding of high value stock. One thing that the prime housing markets prove, even in a period of volatility, is that, over the long term, any commodity in short supply will continue to outperform the average.”
