UK property prices expected to fall in 2010 with no concerted recovery until 2012, report predicts

A concerted recovery in the UK residential property market is unlikely before 2012 but house prices will end the year 2% higher than at the start, according to analysts.

The real estate recovery will be lead by London and southern England but the mainstream UK market is likely to see modest price falls in 2010, they predict in the Knight Frank Residential Property Market Forecast 2009-2014.

Following an up and down 2010 the market is expected to see a limited rise in prices in 2011 and no sustained recovery until 2012, the report says, pouring cold water on recent optimism that the good times are on their way back.

‘The excitement caused by rising prices in recent months has hidden the fundamentals that have contributed to this performance, particularly the degree to which the affluent and equity rich have led the market,’ explained Liam Bailey, head of residential research at Knight Frank.

‘There are good reasons why we ought to expect a slow down in price growth, with prices even falling in 2010.

However we believe that this reversal will follow a more benign scenario, rather than a more cataclysmic alternative,’ he added.

The report predicts that a weak economy will feed through to lower household wealth and both the ability and willingness to bid up house prices. Continuing growth in unemployment, allied to wage freezes and tax rises, and a rise in average mortgage rates will force a number of sales which, in the absence of greater depth of demand, will see prices slipping back.

‘However we believe that price falls will be capped at around 3% in 2010. It would be wrong to expect a continuation of the current rapid recovery in the housing market, the economy is not in a position to permit this in the short-term. Similarly, it would be wrong to expect carnage,’ said Bailey.

Improvement in market conditions will continue to be led from London and southern England, particularly from the higher price brackets, the report adds, with strong demand from UK and international buyers ensuring that the central London property market, in particular, will continue to outperform in 2010.

However, the central London market will not entirely escape the future uncertainty and recent strong price growth is unlikely to be maintained.

But the positive factors underpinning the capital’s prime market should serve to ensure that price falls are avoided next year.

The report forecasts annual growth of 3% in central London prices in 2010, with a steady increase in this rate to 9% in 2011. The aggregate growth for central London in the five years to 2014 is 38%, compared to 19% for the UK mainstream market.

‘London will benefit from the global economic recovery which is likely to considerably outpace that seen in the UK. Sterling is set to remain relatively weak into the medium-term, encouraging international demand and the economic prospects in central London are brightening more rapidly than elsewhere in the UK,’ it concludes.