It is becoming clear that the current conditions in the UK housing market are unlikely to be a temporary phenomenon. The market conditions we called ‘normality’ ten years ago will not be resumed anytime soon. The structure of the housing market has changed, if not permanently then at least for the foreseeable future.

Across the market, rent levels are a good sign that occupier demand is as strong as ever. The biggest question in the current UK market is therefore ‘what value does this rental income have?’ and ‘what does that mean for mainstream house prices?’

Purchasing decisions, whether investor or owner occupier, are all based on perceptions of risk and return and this varies geographically and between different people acting in different capacities.

As a result, headline house price movements, particularly quoted at a national level, increasingly obscure highly localised and market sector specific variations.

Huge divergence

In the past five years, we have seen huge divergence in the performance of different property types and locations. This is represented at the extreme by the performance of large central London houses and small flats in the urban areas in the North of England.

Central London, largely unshackled by a lack of mortgage debt and until now the beneficiary of overseas wealth, has come under the HM Treasury spotlight. Increases in stamp duty and anti avoidance measures have subdued the market in the past six months, and though the threat of a ‘mansion tax’ seems history, the spectre of further wealth tax continues to make buyers cautious.

At the other end of the market, the inaccessibility of mortgage finance and a weak economic recovery have shifted the tenure of younger generations away from owner occupation towards renting. For those with equity looking to buy into this end of the market, the focus is firmly on the sector’s investment credentials and the income it can generate.

Inherent strength

Between these extremes, the extent of recovery in the core of the owner-occupied market will reflect the pace and distribution of economic recovery and the impact this has on sentiment going forwards. The inherent strength of local markets, reflected in measures such as transaction and repossession levels, will also be important.

Our prognosis last year that inflation would continue to strip value from the mainstream housing market has proved to be correct in 2012. We anticipate this trend continuing over our next five year forecast period, during which we expect continued low interest rates, falling inflation and low house price growth. Prime markets are forecast to continue to outperform over the mid-term, with London maintaining the edge.

It is also clear that house price forecasts will be impacted by an increasingly wide range of factors that impact differently on individual sub markets. There are still huge opportunities for developers, investors and even owner-occupiers in this changed environment – provided they understand its causes and effects.

Taken from
Residential Property Focus Q4 2012