But, they say, it is inflation rather than nominal price falls that will erode mainstream UK values, as current low interest rate conditions continue to prevent high levels of distressed stock entering the market so that sharp falls in the headline average house price will be avoided. Rather, an extended period of little or no growth will ensue.
‘The Government’s austerity measures have affected household finances and home buyer confidence so the real casualty of this housing market downturn has been transaction levels,’ said Lucian Cook, director of Savills residential research.
‘The combination of historically low transaction levels and interest rates continue to protect nominal house prices, particularly as measured by the transactions based indices,’ he explained.
Weak economic growth and constrained access to mortgage finance will conspire against price growth and, against this backdrop, Savills is predicting relatively small falls of just 2% in 2012, and total nominal growth of 6% in the average UK house price between 2012 and 2016 but with substantial regional variations.
Relatively strong five year price growth is expected in London at 19.1% and the surrounding markets such as 15.7% in the South East and 14.1% in the East 14.1% but with little or no growth in the northern regions.
Prime markets will also fare better over this time with 22.7% growth for prime central London and an average of 15.1% for the prime markets of the UK as a whole. Growth will be enabled in these markets by lower reliance on debt.
Savills anticipates that, by the end of 2011, around 850,000 residential sales will have completed, which is just over half of the level recorded annually prior to the credit crunch. This, along with the fact that more equity and less debt was used to buy property than was the case before the credit crunch, has meant prices on transactions have remained low but relatively stable across most of the UK. Average prices are still 9.5% away from peak over most of the country, excluding London and the South East which are down 2.9% and 7.7% respectively.
Low interest rates which have gone some way towards supporting household finances during this economic downturn are, according to forecasts from Oxford Economics, unlikely to increase before the second quarter of 2013. This will go some way towards preserving house price affordability, measured as surplus income after housing costs and basic spend, levels for longer.
Importantly, this means that the market has not been, and is unlikely to be flooded with and suppressed by large volumes of distressed stock, says Savills. However, low interest rates cannot be relied upon as a trigger for a return to real house price growth.
Add inflation into the equation though and the picture changes significantly. In recent decades, average house prices have outgrown inflation by around 2.5% per annum, but during the recent downturn, there has been no real growth, meaning that, in real terms, mainstream house prices now stand at 2003 levels.
Some of the affordability cushion built up during 2008 when house prices, levels of borrowing, and interest rates all fell, has already been eroded by the rebound in house prices in the South during 2009, high levels of inflation and stagnant real incomes. These factors, combined with the inevitable interest rate rise, will deflate the cushion further meaning the capacity for price growth at a national level will be limited. This will also limit the capacity for transaction levels to recover. Adjusted for inflation, growth during the same period is forecast to be -11% for the UK and 2% for London.
‘We anticipate that these poor capital growth prospects will change investor expectations and lead to a search for income. On this the company is optimistic. Strong rental growth will push out yields to increasingly attractive levels, so we expect new investors to enter the market in numbers over the next five years,’ said Cook.
Savills also believes that the reduced expectations for house price growth may well temper the willingness of banks and building societies to lend while the prospect of tighter restrictions on lending, in light of the ongoing global financial stress, will doubtless affect their capacity to do so.
‘This points to a slower and later recovery in transaction volumes meaning that in the 10 years to the end of 2016 transaction levels could be seven million fewer than in the preceding 10 years. The silver lining in the trends now seen in the mainstream market will be a welcome downward correction of average house prices relative to income and higher rental yields that will help to pull in investors into the private rentals sector,’ explained Cook.
‘But we certainly do not believe the trend of inflation busting house price growth has been consigned to history. At the end of 1995, inflation adjusted house prices were at the same level they were 12 years previously. In the following decade they rose by 140%,’ he added.
