Average mainstream property prices set to rise 25% by end of 2018

The mainstream residential property market in the UK could average price growth of 25% by the end of 2018, according to the latest five year forecast from international real estate adviser Savills.

It predicts that prices will rise by 17% in the next three years due a lot of positive sentiment in the real estate market 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.

The 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.

‘Though we expect London to continue to outperform in the short term, it is unlikely to continue to do so indefinitely,’ said Lucian Cook, Savills head of UK residential research.

‘The capital has already been the strongest performing region of the UK since the middle of 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,’ he explained.

‘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,’ he added.

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 and cash will remain king in the more expensive end of the mainstream 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. A meaningful increase in transactions is likely to be dependent on improvements in mortgage lending,’ Cook said.

‘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,’ he added.

He also pointed out that cash is expected to remain the dominant source of funding over the next five years meaning that areas with high levels of inbuilt 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.

‘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,’ explained Cook.

‘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,’ he concluded.