Residential research - The outlook for the UK housing market

Knight Frank: UK housing forecast

Knight Frank today publishes its latest house price forecasts, showing that mainstream UK prices are set for a ‘slow correction’, while prime central London prices will continue to climb.

Key headlines:

  • Prime central London prices will climb 5% next year, before pausing in 2013 and rising by a further 4% in 2014. Cumulatively, prices will rise 24% by the end of 2016.
  • Geo-political issues will continue to push overseas buyers into London, especially at the top end of the market, as the capital is seen as a safe haven
  • The prime central London market will remain “de-coupled” from the rest of the UK market
  • Average house prices across the UK will drop by 5% next year and will show little convincing growth until 2014
  • In real terms, adjusted for CPI inflation, house prices will have fallen 29% from the peak of the market by 2015 and will not regain the levels seen 2007 levels until 2028
  • Prime country house prices will slip by 2.8% next year before returning to growth in the mid-term following the establishment of more convincing UK economic growth from 2013 and beyond

Grainne Gilmore, head of UK residential research at Knight Frank, said: “After falling by 15% in 2008, it was widely forecast that the market would dip again the following year, but this failed to happen - largely because of the drop in interest rates. We believe that this correction is still to come, but that it has been pushed further and further out because of low base rates. But next year, amid a “perfect storm” of a struggling economy, public sector cuts and rising unemployment, prices will fall. As interest rates start to rise, prices will struggle to maintain any notable growth until 2015.”
Commenting on the Prime London property, Liam Bailey, head of research at Knight Frank, said: ”Prices in prime central London are currently at an all time high, despite which we believe there is scope for further price gains over the next 12 months, averaging 5% across 2012. The reasons which have underpinned recent growth, a weak pound, renewed wealth creation in emerging markets, the search for safe-haven assets and flight capital – all seem set to continue at least in the short term reinforcing our positive view for next year.”

Hostage to fortune - Four predictions for the future

1. Governments will stop trying to support house prices

We have said before that resisting the temptation to tinker is probably the best thing policy makers can do in the residential market. Most interventions since 2007 (such as interest-free equity loans for first-time buyers, and support for shared equity) have been designed to prop prices up. This is not a good idea, it helps a small and fortunate group of first-time buyers while actively hindering everyone else.

We think there is a growing realisation in government that its role is to support supplyside initiatives, for example the accelerated release of development land with easier purchase terms (the new ‘Buy Now: Pay Later’ policy) and reforms to the planning system. These at least have the aim of helping to widen housing market accessibility through increased supply.

2. Coalition planning reforms will lead to more private housing completions

The caveat here is that it will take a while for completion volumes to rise in a meaningful way. Our belief is that once the National Planning Policy Framework comes into force, the incentives to build will increase.

In the short term we could see a spike in applications, as developers look to capitalise on an embryonic new system, and local authorities work to supply the mandatory additional 20% of development land in the first five years of the scheme’s operation.

While appeals from disgruntled local residents and community groups could slow the approvals process, we think the new planning laws could help to appreciably boost the number of private dwellings through the next market cycle. A reduced role for public sector developers will nonetheless mean that the government will struggle to achieve its ambitious housing targets in full.

3. The ‘mansion tax’ will not see the light of day

Speak to one half of the Coalition and the mansion tax has become a totemic issue (just look at its name). Speak to the other half and they recoil in horror. Trying to gauge where the final decision will lie is pretty much guesswork.

Our view is that Mr Osborne will give the Lib Dems something in return for the abolition of the 50% income tax rate, possibly involving a combination of a delayed date for abolition of the tax together with new enhanced highvalue council tax bands.

4. Crossrail will boostprices in London and the South East, further accentuating the North/ South divide

The new transport link provided by Crossrail in 2019, from Maidenhead in the west to Abbey Wood and Shenfield in the east, via Paddington, Bond Street, the City and Canary Wharf, will boost the number of workers who can commute into the capital, helping support house prices in the surrounding areas.

Within the capital, the train link will change the dynamics of the housing markets in the localities around the stations, with prices in Paddington, Bayswater, Farringdon, the City and the City Fringe in Whitechapel set to particularly benefit.

London and its growing hinterland needs new infrastructure, but the dynamism this type of project lends to accessibility and economic flexibility in the South will enhance and entrench the economic and housing market divide with the North.

Courtesy: Knight Frank

For further information please contact: 

Daisy Ziegler, Knight Frank London Sales and Lettings PR Manager
Tel: +44 (0)20 7861 1031  Email: [email protected]

Marketing advice: Except where specifically stated to the contrary, any information about
price or value contained in this email is provided purely as guidance prior to a possible
transaction. It does not constitute a formal valuation and may not be relied upon for any
purpose whatsoever other than as marketing advice.

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