The firm’s reports says that the housing market in the UK has experienced a notable rise in transactions and prices in the second half of 2013, amid returning confidence in the economy and government interventions in the mortgage market.
‘This performance marks a turnaround from recent years during which the housing market in many regions outside London and the South East were largely moribund. Average UK house prices fell by 26% in real terms between late 2007 and the end of 2012, and, despite strong nominal price growth in 2013, prices are still nearly a fifth below their pre-crash peak in real terms,’ said Grainne Gilmore, head of UK residential research.
‘However, we expect this recent positive price growth will continue across the UK next year, although with regional variations. Indeed, the wider UK market remains highly localised, with those regions closer to London performing more strongly thanks to their economic connections to the capital. This is not to say that homes in the north of England will not experience some growth in prices in the coming years,’ she explained.
Knight Frank is forecasting that prices in the North East will rise by 3.3% in 2013 and 6.7% in 2014. In the North West the prediction is for 4.8% in 2013 and 7% in 2014 while in Scotland prices are expected to rise by 3.6% this year and 6.3% next year.
In Yorkshire and Humberside the rise is likely to be 6% in 2013 and 6.6% in 2014, in East Midlands the forecast is for 6.4% and 7.3%, in the West Midlands 5.2% and 7%, in East Anglia 7.4% and 7.3%, and in Wales 5.2% and 6.8%. London will see the highest growth with prices predicted to rise by 11.3% this year and 8.4% in 2014. In the South East the projection is 5.6% and 7.6% and in the South West 4.7% and 7.6%.
While average house price values will continue to rise over the next five years, the pace is expected to decelerate as the end date for both Help to Buy schemes approaches during 2015. In addition, it points out that Funding for Lending will also be drawing to a close in 2015, and concerns about rising interest rates will likely gather pace.
Gilmore also explained that without a dramatic increase in construction, the structural undersupply of housing in the UK will remain as a factor underpinning prices. ‘A splurge on supply would certainly help to bring market fundamentals back in line with long term trends. But while house builders and developers have increased their development activity over the past year, it is very unlikely that this modest level of improvement will have any significant impact on pricing in the next few years,’ she said.
The report also points out that the UK’s ultra low base rate has put a floor under prices since the financial crisis, making mortgage payments more affordable and creating an environment where repossessions have been very low. Credit has now become cheaper, thanks to Funding for Lending, and easier to access, thanks to the government’s Help to Buy scheme.
‘We expect these government interventions to have a positive impact on sales volumes in the coming years, although we anticipate a temporary deterioration in transactions after the Help to Buy scheme ends in 2016,’ Gilmore explained.
‘In terms of prices, we see price growth slowing towards the scheduled end of these government schemes, as the market anticipates the gradual withdrawal of this mortgage stimulus,’ he added.
‘By 2016 the economy ought to be on a stronger footing, with rising employment and rising real incomes. This will help the transition to a largely stimulus free market, but we remain of the view that the UK will see a period of more modest nominal price rises after 2016,’ she concluded.
When it comes to prime property in central London, the report shows that this sector has outperformed since 2009, but it forecasts that it will begin to lose ground compared to the mainstream market over the next few years, while the country house market will begin to strengthen.
Prices in prime central London have risen by more than 60% since their post crash low in March 2009, and now stand well above their pre-crash peak in early 2008. Despite increases in stamp duty on high value property, and the talk of more tax reform in the future, the market has continued to deliver strong returns through 2013.
‘Our view is that price growth will continue in prime central London in 2014, however we believe growth is likely to stall in 2015 due to market uncertainty in the run up to the UK general election. Following the election, our longer term view is that price growth in prime central London will run ahead of inflation, leading to nominal as well as real price growth,’ said Gilmore.
‘Within the market however, we are not ruling out the possibilities for local outperformance, especially in areas where there is structural change to the market. One good example of this is Crossrail. As the opening of the high speed service approaches, we foresee prices in and around central London stations gaining extra momentum,’ she explained.
‘Our forecast for prime outer London, covering prime south west London, prime north London and prime east London, is that pricing here will outperform the central London market in 2014 and 2015, and again will see nominal as well as real price growth from 2016,’ she added.
The report also points out that over recent years the country house market has under performed the London market by some margin, and until 2013 saw price falls. But it predicts that the ripple effect already referred to is likely to contribute to stronger price growth for the country house market in 2014 and beyond, in line with regional forecasts.
‘Within all prime markets, we expect that the divergence in price performance depending on price bands will continue. As well as disparity between price movements across the regions, we have observed in recent months that the disparity between the markets in the sub-£2 million price bands and the £5 million plus bands has been widening, both in London and the country,’ Gilmore said.
‘The 7% charge for stamp duty on homes worth more than £2 million has boosted the popularity of homes below this price threshold, and it is these sales which will continue to drive the prime market in the coming year or two,’ she added.
