Residential Property Focus

Residential Property Focus 2015 Issue 2
Crossing The Trend-Line

24 June 2015, by Lucian Cook

What are the key drivers of house prices at a regional and local level?


The UK housing market is an amalgamation of local markets with different drivers. Understanding what the future holds at a local level requires an understanding of where each market sits in the housing market cycle and the underlying pressures on housing.

What is the net effect of house price growth of the past 10 years?

Despite widespread concerns over the cost of housing, Land Registry figures indicate that on average house prices across England and Wales have fallen by 16% on an inflation-adjusted basis over the past 10 years. Prices are below their level 10 years ago in real terms in 145 of the 179 local markets covered by the index.

Yet in London prices have risen by an average of 25% after the cost of inflation, with real house prices more than 50% above their level of 10 years ago in nine out of the city’s total 33 boroughs. By contrast, in the North East prices have fallen by 35% in real terms in the past decade and at the most extreme, by more than 40% in Darlington, Blackpool & Durham.

Does this just reflect where we were in the market cycle in 2005?

The headline numbers certainly reflect the fact that house prices were well ahead of the 'trend-line' in 2005. This trend analysis suggests that, ignoring the peaks and troughs in the market, price growth has on average exceeded the general rate of inflation by 2.7% over the past 40 years.

By 2005, however, we were approaching the end of a sustained period of house price growth, typified by the fact that at this stage of the cycle traditional ‘lagging’ markets across the North of England and Wales had been through a period of catch-up.



Real house prices (actual vs trend line)

Figure 3

Source: Savills Research, Nationwide

Are house prices therefore now generally back in line with where they should be?

Our analysis indicates that at a national level prices now sit on average 8% below the trend-line but there is significant regional variation, with London looking like it is at a different point in the cycle compared to the rest of the UK.

But aren’t London’s market drivers different to the rest of the country?

This is certainly true, to a degree. Again, ignoring marked highs and lows across market cycles, the inflation-adjusted, long-term trend rate of house price growth in London is 3.6% per annum compared to 2.3% in the North East of England. This may not sound like a big difference, but over a 40-year period it equates to real house price growth of 322% compared to 146%.

This partly reflects different earnings and wealth creation drivers in different parts of the country. For example, VAT and PAYE records show that 36% of local business units in London are in the Professional, Scientific & Technical, Information & Communication, or Finance & Insurance sectors. This compares to 20% in the North East.

In turn, migration to the employment markets of London and the South East has created very different levels of pressure on housing stock at a regional and local level.



House prices and business activity - The business environment contributes to the highest rate of price growth in London

Figure 4

Source: Savills Research

How much of an impact has this had recently?

In London, over the past five years, when house prices have risen by 20% in real terms, the number of business units in these high value employment sectors has risen by 26%. This compares to 17% in the North East and 12% in Wales.

In Hackney, Islington and Camden – some of the hottest housing markets of the past five years – the number of business units in these sectors had risen by 6,100. This compares to 8,640 across the whole of the North West of England.



Business units in high value sectors

Figure 5

Source: ONS

So where does that leave the capital?

The cost of this economic success is a high cost of housing in London, particularly among younger households (as touched on in our lead article). In future this could affect decisions about where to live and work, potentially pushing them to other towns and cities which offer reasonable job prospects but relatively low housing costs.

Notably, irrespective of the fact that London has a higher long-run trend rate of house price growth, prices still sit above that trend-line currently, in contrast to the rest of the country. This does not mean prices in London need to fall, but it does mean the capacity for price growth among mortgaged buyers is lower than elsewhere in the country.

In particular, the markets across the remainder of the South of England generally have higher trend rates of house price growth than those of the Midlands and the North. They are also currently priced slightly below their trend-line and are likely to feel the stimulus of economic activity in the next phase of the economic cycle.


Interactive Maps

View our interactive maps of the proportion of businesses in high value sectors and the 10-year real house price growth:

■  High value business sectors map

■  10-year real house price growth map


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