As a result international real estate adviser Savills has released a revised five year mainstream market forecasts taking account of growth seen in the first half of 2014.
The firm now expects average annual UK house price growth to settle at 9.5% this year, up from the previous 6.5% forecast. This will be followed by 4% growth in 2015 and 25.7% overall in the five years to the end of 2018, just fractionally higher than the 25.2% originally forecast.
The most notable changes to the published Savills forecasts are for mainstream London and, to a lesser extent, the corresponding markets in the South and East of England.
So far this year, house price growth in London, the South and East of England has significantly exceeded forecast, with all expected to end the year well into double digits.
Price growth in these mortgage-dependent mainstream markets remains high according to the majority of relevant indices, though there are signs that demand is weakening, with lead indicators suggesting a change in sentiment in London.
In London, full year growth is expected to settle at 15% against a previously published forecast of 8.5% despite an anticipated slowing in the second half of the year. While the five year growth forecast for the period 2014/2018 remains almost unchanged, the rate of recent growth will mean affordability will become stretched as and when interest rates rise.
The markets of the South and East of England were all originally forecast to show marginally higher levels of growth than London in 2014 at 7% but have in fact underperformed the capital to date. Nonetheless, they too are now expected to end the year in double digit growth.
These markets are still expected to show the strongest five year growth, outperforming London, as evidence mounts of the flow of buyers and equity out from the capital. The Midlands and the North have the potential to outperform thereafter, as has been seen in previous cycles.
A breakdown of the figures shows growth in London next year at 5%, followed by 0% in 2016 and then rising to 1% in 2017 and 2% in 2018. In the South East the forecast is for 5%, 4%, 4% and 3.5% with a similar forecast for the South West at 4.5%, 4%, 4% and 3.5%.
The forecast for the East of England is for growth of 5% in 2015, followed by 4%, 4% and 3.5%. In the East Midlands it is 5%, 4%, 4% and 3.5% while in the West Midlands it is 4%, 3.5%, 3.5% and 3%.
Further north, where prices have been slower to grow, the forecast is not much different. In the North East it is for growth of 4% in 2015, followed by 3%, 2.5% and 2.5%. In the North West it is 4.5%, 3%, 3% and 2.5% and in Yorkshire and the Humber it is 4.5%, 3%, 3% and 2.5%.
In Wales it is 3.5% in 2015, followed by 3%, 3% and 2.5% while in Scotland the forecast is for growth of 2.5% in 2015, followed by 3%, 3% and 2.5%.
‘House price growth in the mainstream market has been underpinned by record low interest rates, rising loan to income lending and pent up demand from buyers re-entering the market as the economy and consumer sentiment have improved,’ said Lucian Cook, Savills UK head of residential research.
‘But these extraordinary rates of house price growth cannot continue in the current, more regulated mortgage environment, particularly in the face of likely interest rate rises,’ he added.
Research by the firm suggests that the total current cost of mortgage interest amongst owner occupiers in Great Britain stands at £33 billion, a figure that is at the same level as a decade ago. However, a 2% rise in interest rates would increase this by £20 billion, adding £2,360 to the average annual mortgage bill across England and Wales and £4,000 in London.
‘Higher interest rates would increase the risks in sectors of the market where borrowers have taken on high levels of mortgage debt relative to income, but it is difficult to see this as a catalyst for a wholesale housing market correction, rather we anticipate a slowing of growth, particularly in London and the South,’ explained Cook.
The Savills forecasts are based on an assumption that average mortgage interest rates, base rate plus lender's margin, will reach 5% by the end of 2018, a level that Cook believes would leave room for further price growth at a national level at the end of the forecast period.
