Market slowdown – UK house price growth expected to plummet

Market slowdown – UK house price growth expected to plummet


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Average house price values are set to rise by a total of 12.9% by the end of 2026, but affordability pressures will create a market slowdown, according to Savills.

The latest UK mainstream house price forecast analysed data from Nationwide which found the average house price rose 5.0% in the first quarter of 2022 – driven by a continued imbalance between demand and supply.

Values are forecast to rise by a total of 7.5% in 2022. However, despite economic headwinds, increasing stock levels will underpin further price growth in the short term.

Savills predicts affordability pressures will ‘substantially moderate’ further price growth for the remainder of this year, as demand eases and buyers become more budget-conscious.

The combination of strong price growth over the past two years (+20% to the end of April), rising interest rates and a cost of living squeeze, will likely limit the capacity for growth over the following four years.

Savills now estimates that price growth in the next four years (2023-2026) will average a total of 5.1% across the UK as a whole, with markets in the North of England growing most strongly.

Table 1: Mainstream House Price Forecasts and Economic Assumptions May 2022

 

2022

2023

2024

2025

2026

Total

Average UK House Price Growth

+7.5%

-1.0%

+1.5%

+2.0%

+2.5%

+12.9%

Residential transactions

1,310,000

1,140,000

1,090,000

1,090,000

1,090,000

5,720,000

Loan-to-income ratio

3.91

3.73

3.70

3.68

3.66

GDP growth*

5.2%

3.3%

4.2%

3.8%

3.7%

21.9%

Bank Base Rate*

1.50%

1.50%

1.75%

1.75%

1.75%

Inflation (CPI)*

6.8%

1.1%

1.2%

1.5%

1.7%

12.8%

Source: Savills and Oxford Economics (figures year to Q4)

Prime market will be least affected

The top end of the market, described as ‘prime’, will outperform the mainstream market, due to the fact that wealthier buyers will be less impacted by the current economic conditions and rising interest rates.

Lucian Cook, head of residential research at Savills, comments: “A lack of supply and strong buyer demand fuelled by the experience of the pandemic has turbocharged house price growth over the past two years, despite growing economic headwinds.”

“This, combined with the rising cost of that borrowing and cost of living pressures, leaves less capacity for further price growth, especially within markets where borrowing is high relative to incomes.”

He says Savills has downgraded its projections for 2023-2026 as a result. Instead, it anticipates ‘modest price falls’ next year as the heat comes out of the housing market. He adds that nothing points to a price correction.

“Affordability will be squeezed at the point of purchase, but interest rates are forecasted to remain low within a historical context and strong employment levels should serve to protect existing homeowners,” continues Cook.

“The key variables in our forecasts are the path of interest rates and whether the Bank of England follows through on recent proposals to relax stress testing of mortgage affordability. The removal or relaxation of the stress test could improve the outlook for prices.”

“However, additional capacity for growth would be dependent on the precise terms of reform and how far lenders are prepared to push loan to income multiples in a higher interest rate environment.”

Savills has based its forecasts on the latest projections from leading global forecaster Oxford Economics. This assumes that the Bank of England base rate will not exceed 1.75% by the end of 2026, with the annual rate of inflation falling rapidly in 2023.

Cook concludes: “If interest rates rise higher than is currently being projected, capacity for price growth could be quickly eroded.”

Regional outlook and predictions

On a regional scale, the North, Wales and the Midlands are expected to see strong value growth, with slower growth in London and the South.

With unequal affordability squeezes across the country, prices are expected to grow most rapidly in areas where total value growth since the peak of the market (2007/8) has been the lowest.

“The gap between the average household and the average purchase price has widened over recent years – most significantly in London and the wider South, where price growth has been highest in the last 15 years and affordability pressure is, therefore, greatest,” says Lawrence Bowles, director of residential research at Savills.

“As prices have risen, the market has become increasingly confined to more affluent households, as those on lower incomes have been priced out of the market. This sets a precedent for what might happen more widely.”

“In the North, however, prices have not risen as significantly and affordability is not as stretched. Loan to income ratios have remained lower, meaning there is greater capacity for borrowers to take on more debt before an affordability ceiling is reached. Price growth is likely to be stronger as a result.”

Table 2: Mainstream* house price forecasts 2022-2026

 

2022

2023

2024

2025

2026

5-year total

North West

10.0%

-0.5%

2.0%

2.5%

3.5%

18.4%

Yorkshire and The Humber

10.0%

-0.5%

2.0%

2.5%

3.5%

18.4%

Wales

10.0%

-1.5%

2.0%

2.5%

3.5%

17.2%

North East

9.0%

-0.5%

2.0%

2.5%

3.5%

17.4%

East Midlands

8.5%

-1.0%

2.0%

2.5%

3.0%

15.7%

West Midlands

8.5%

-1.0%

2.0%

2.5%

3.0%

15.7%

Scotland

8.5%

-1.0%

2.0%

2.5%

3.0%

15.7%

South West

7.5%

-1.5%

1.5%

2.0%

2.5%

12.4%

South East

6.0%

-1.5%

1.0%

1.5%

1.5%

8.6%

East of England

6.0%

-1.5%

1.0%

1.5%

1.5%

8.6%

London

3.5%

-1.0%

0.5%

1.0%

1.0%

5.0%

UK

7.5%

-1.0%

1.5%

2.0%

2.5%

12.9%

Source: Savills research, ONS

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