House prices to stabilise in 2013 but inflation will continue to erode value

Average house prices will struggle to show inflation-beating growth for the foreseeable future, says Savills who today published their five year residential market forecasts.

Having fallen by an average -2% this year, the firm forecasts that the average UK house price will rise by just 0.5% in 2013 and a further 1.5% in 2014, with growth totalling 11.5% over the next five years.

But, they say, this headline 11.5% average price rise will equate to falls of around 3%, after adjustment for inflation.

“Last year we forecast that UK house prices would fall by -2% and that inflation rather than price falls would continue to strip out value thereafter,” says Lucian Cook, director, Savills residential research.

“This year we have seen average values fall in real terms.  We now expect the market to show slight nominal growth next year, but remain negative in inflation-adjusted terms until 2016.”

He explains that the mainstream market continues to adjust to weak economic growth and the long-lasting effect of the credit crunch on the accessibility to mortgage debt.

Regional variations will also become more pronounced:

 

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Market continues to benefit the equity rich

Savills forecasts that by 2017 annual transaction levels will reach almost 1.17 million, up one-third from their average in the years since the credit crunch, but still 28% below the pre peak norm.

They also expect the market to favour those with equity.

The under 35s currently control less than 4% of the housing wealth in the owner occupied sector while the over 55s own over two-thirds, creating a huge chasm between the different generations in their ability to trade in a debt-constrained housing market.

This will be reflected in transaction levels in different locations and sectors, and a continued move toward renting in lower age groups.

Sales volumes in the sub £250k price bands will continue to be suppressed by a lack of mortgage activity, and are expected to increase by no more than a third over the next five years. This is still just over two-thirds of peak 2007 turnover levels.

Savills estimates that the amount of housing wealth held by the under 35s will fall by 24% to £62 billion over the next five years. Simultaneously, the lower tiers of the market will become increasingly driven by the investment value of property in an expanding private rented sector.

By contrast, at the upper end of the market, where buyers and sellers hold the majority of the UK’s housing wealth, sales of £1 million plus homes will increase by around three-quarters, to exceed peak levels by 19% by 2017.

This more buoyant market will see the amount of housing wealth held by the over 55s increase by 16 per cent – to £1.65 trillion by 2017.

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