Prime central London set for a rebound and 20% growth in next five years

Savills forecast for UK house prices 2020-2024*:

• Average UK house prices to rise 15.3% from 2020-2024, with significant regional variation
• Growth will range from 24% in the North West to 11% in the East and South East and 4.0% in Greater London
• London’s prime markets will outperform the mainstream - prime central London +20.5%, outer prime London +11.5%
• Average rents to rise 18.8% in London and 13.1% across the rest of the UK, against income growth of 15.6%
• Transactions to remain steady at around 1.2m, with cash buyers around a third of the market
• First time buyer numbers to slip back slightly, as Help to Buy is withdrawn

UK house prices are forecast to rise by an average of 15.3% over the next five years, with significant variation between regions, and between the prime and mainstream markets, particularly in London, according to new forecasts from international real estate adviser Savills. 

Prime central London, where median values stand at just over £2.75 million, is forecast to be one of the strongest performing markets, reversing a trend seen over the past five years.

At a national level, Brexit and election-related angst will continue to act as a drag on the market over the short term, but the firm expects prices to rise broadly in line with incomes thereafter. 

“We anticipate a continuation of trends seen historically, where London and the South East underperform markets in the Midlands and North,” says Lucian Cook, Savills head of residential research.  “This stage of the cycle appears to have begun in 2016, coinciding with the referendum, when London hit up against the limits of affordability.

“Markets further from the capital, such as Leeds, Liverpool, and Sheffield, were much slower to recover post financial crisis and have much greater capacity for house price growth relative to incomes, even as interest rates rise.”

The North West is forecast to see the strongest price growth (24.0%) between 2020 and 2024, reflecting the strength and diversity of the regional economy and the capacity for higher loan to income borrowing, followed by Yorkshire and the Humber (21.6%).  Wales and Scotland will also perform strongly, with price growth around 18% and 20% respectively. 

Average house prices are expected to increase by just 11% across the South and East of England and 4.0% across Greater London having outperformed the rest of the UK in the 7.5 years leading up to the referendum according to Nationwide. 

Savills 5-year mainstream (all market average) house price forecasts 2020-2024

Source Savills research (Land Registry for current house prices)

These forecasts assume the election does not result in a significant shift in policy environment, that the UK ultimately achieves an orderly exit from the EU over the course of 2020 and avoids recession. They also assume that the bank base rate increases gradually to 2.0% by the end of 2024, constraining mortgage affordability and therefore house price growth.

Mainstream rental forecasts

Rents are set to rise ahead of wage inflation in London, growing a total of 18.8% over the next five years.  Affordability pressures in the for-sale market will continue to push demand into the rental market at a time of increasing pressures on private landlords, which have led some to exit the sector.  New purpose-built, professionally managed homes for rent will help mitigate but not reverse this drain on supply.

At a regional level, there will be less upwards pressure on rents, with growth across the rest of the UK expected to average just 13.1% on average.

Prime – a different story

In contrast to London’s mainstream market, Savills forecasts that prime central London values will rise 3.0% next year, the first annual price growth since 2014, and increase 20.5% over the next five years. 

While average house prices across Greater London have risen 15% over the past five years, the compound effect of stamp duty reform and the Brexit vote has resulted in falls of 20% across prime central London. Accounting for currency fluctuations, this equates to a discount of around 42% for a US dollar buyer.  

“Prime central London has become increasingly dislocated from the Greater London mainstream over the past five years; we expect that to go into reverse,” says Cook.  “Historically, a recovery in the prime markets has been sparked in prime central London, when the city’s most expensive properties start to look good value on a world stage.  

“Values have been bottoming out over the past year, resulting in a build-up of new buyer registrations over recent months. Both signal that the market is set for a bounce, but this is being held up by uncertainty.” 

Cook describes his firm’s forecast for prime central London as ‘a weaker recovery than seen in previous cycles’ due to the higher tax environment, the likelihood that the cost of money will gradually increase, and the fact that London has matured as a global city and financial centre. 

Prime beyond central London

Price growth in the most expensive central locations will displace demand to other prime London locations from 2021, meaning they too will outperform the wider London average. 

These markets, where median values stand at around £1.2 million, are more dependent on domestic wealth generation and more susceptible to interest rate rises and the strength of the underlying mainstream market.  Growth will therefore undershoot prime central London, totalling 11.5% over the coming five years, Savills forecasts.

The value gap between prime London and its extended commuter belt will allow slightly higher levels of price growth, peaking at 14.2% across the wider commuter belt, but the strongest performers outside the very core of prime central London will be the prime markets of Scotland (19.9%), the Midlands and North of England (20.5%).

Savills prime market forecasts 2020-2024

Source: Savills research

IMPORTANT NOTES:

* The Savills capital value forecasts apply to the resales market; the performance of new build properties will vary. Our rental value forecasts apply to traditional privately rented homes; the performance of professionally managed Build to Rent homes will differ.

Forecast assumptions:  These forecasts assume the General Election on 12 December 2019 returns a slim Conservative majority (based on the fact that the polls are showing they have the biggest share of the vote), which agrees some form of withdrawal agreement with the EU in January 2020. There are no further changes to mortgage regulation and mortgage lenders maintain margins and loan to value ratios at current levels, except in London where loan to value ratios fall. In line with Oxford Economics forecasts as at October 2019, average nominal GDP growth of 3.7%, CPI between 1.6% and 1.9%, and household income growth at around 3% throughout the forecasting period are all base assumptions.  Stamp duty rates are expected to remain unchanged.