Savills upgrades UK house price forecasts

Property group Savills has today released an upgrade to its 2021 forecasts for UK house prices from zero to +4% growth, while new forecasts for the five years to the end of 2025 anticipate growth totalling 21.1%.

• Average UK house prices to rise +4% in 2021, with +21.1% total growth from 2021-2025
• Housing transactions to hit 1.4m in 2021 before falling back to a norm of 1.2m by 2023
• Interest rates to stay low for longer supporting growth: base rate assumed to hit just 0.5% by 2025 according to Oxford Economics

Mainstream market:

• Markets furthest from London to see strongest 5-year growth: North West +28.8% and Yorkshire & The Humber +28.2% leading the way.
• High levels of equity in London and South East to support growth despite high house price to income constraints: +12.6% and +17.0% respectively

Prime (broadly top 5% by value) market:

• Prime central London rated a ‘buy’ at -21% from peak and is forecast to rebound strongly: +3% in 2021; +7% in 2022 and total +21.6% 2021-2025
• Outer prime London +14.6% over 5 years
• Search for space and lifestyle relocation to drive other prime UK markets: points to further strong demand in prime lifestyle and country house markets averaging 20.5% as a 5-year average

The new upgraded forecasts from Savills follow an unexpectedly strong market in 2020, which saw prices rise 7.3% - the first time in modern history that house prices have risen in a recession - as people’s desire to move home outweighed the uncertainty surrounding jobs and finances. 

“2021 is going to be a complex and uneven year, with competing forces impacting the housing market at different points,” says Lucian Cook, Savills head of residential research.  “But the outlook has improved since the beginning of the year given the speed of the vaccination programme, the expected relaxation of social distancing measures and government support for both jobs and the housing market.

“Real-time data from TwentyCi tell us that new sales agreed remain well above the pre-pandemic norm, with the same true of mortgage approvals. That points to a strong first half which, together with the introduction of the mortgage guarantee scheme, underpins our expectation of 1.4m transactions in 2021. 

“By extending both the stamp duty holiday and the furlough scheme in last week’s Budget, the Chancellor has significantly reduced the downside risks in the mid-year, while a recovering economy should support price growth towards the year end.”

Mainstream forecasts and Economic Assumptions

Sources: Savills, *Oxford Economics

“The expectation that interest rates will stay lower for much longer than was predicted pre-pandemic, means there remains capacity for medium-term house price growth despite the unexpectedly strong performance of last year.   Across the country as a whole 5-year price growth of around 20% looks sustainable without unduly depleting mortgage affordability.”

The price growth is expected to peak at 5.0% in 2022 as the economy rebounds, but will then slow as the fundamentals of mortgage affordability determine levels of price growth and its regional distribution. 

Regional outlook:

While the demand for more space has meant regional house price growth has been relatively even across most of the UK, from 2022 Savills expects to see a return to the pattern of growth that would normally be expected at this stage in the housing market cycle.  That indicates stronger price growth in the markets further from London, where lower house price to household income ratios leave more capacity for price growth (see table below).

While expectations for price growth in the London mainstream market are constrained to 12.6% over the next five years, the outlook in the prime markets of the capital – most notably in central London - is somewhat stronger.

The prime market story

In the prime markets, the strongest five year growth is expected in prime central London (+21.6%) which looks good value in a global and historical context after six years of price adjustments. 

Outer prime London benefited from a flow of wealth from more central postcodes in 2020, a trend set to continue this year, but its greater dependence on domestic wealth generation points to lower five year growth  (+14.8%).

The wider commuter belt and the South of England (+21.6%) will continue to benefit from lifestyle relocation from the capital, while the value in the markets of the Midlands (+21.1%) and Scotland (+22.8%) will continue to support growth from local upsizers and buyers relocating from other regions.

“Prime central London offers a real buying opportunity,” says Frances Clacy, Savills residential research analyst. “Activity has already picked up more quickly than expected, with more £5 million-plus sales last year than since 2016.  It tells us that buyers believe in the future of London as a global city and supports our expectation that values will recover quickly as the city reopens for business and international travel resumes.”

Savills expects prime central London prices to start rising in the second half of 2021 and end the year with 3% gains, followed by a strong 7% bounce in 2022.

Across outer prime London and wider prime UK housing markets the search for space and lifestyle change are expected to remain dominant drivers in 2021, Savills says. 

“Buyer commitment to moving remains strong and longer term adaptations to home working will benefit London’s wider commuter zone,” says Clacy.  “The move to the country trend also shows no sign of slowing.  In particular, this points to a continuation of the country house revival and a demand for lifestyle relocation and second homes that will favour locations such as Devon, Dorset, Norfolk and Suffolk.”

Price sensitivity will continue to be a factor this year, Savills says, but the value gap between towns and cities and neighbouring village and rural markets, will continue to support prices in the latter.  This will lead to variations in the price growth between different locations.

“Looking further ahead, the wider tax environment and any longer term implications of Brexit could impact buyer spending power in the prime markets,” says Clacy.  “The government will need to begin to recoup some of the costs of its pandemic support packages, something we might see once the economic recovery takes hold.  This moderates price growth expectations later this year and through the next two years.”    

Mainstream residential capital value forecasts 2021-2025

Source: Savills research, *Nationwide

Prime residential capital value forecasts 2021-2025

Source: Savills research

N.B. These forecasts apply to average prices in the second hand market. New Build values may not move at the same rate.