There have been wide geographical differences in the performance of housing in the past five years, a trend we expect to continue over the next five years based on assumptions of continued constrained lending conditions and a slow economic recovery (see Map 2.1 for mainstream house price growth from 2007 - 2012).

Regional economic forecasts still point to a recovery led by London and the South East. Here, housing transactions are strongest and repossession levels lowest, although price growth will vary at a local level.

The experience of London over the past five years is telling. Six boroughs – Westminster, Kensington & Chelsea, Hammersmith & Fulham, Hackney, Islington and Camden have seen positive inflation-adjusted price growth, but in Barking & Dagenham, Newham, Croydon and Havering prices have fallen by more than 20% in real terms.

Beyond London, only in two areas – Surrey and Windsor & Maidenhead – are average values back above their previous peak. But even in these equity-rich markets real house prices have been reduced by inflation. This correction that seems to have been enough to allow turnover to recover to within one third of pre-crunch market capacity. Healthier turnover should mean that they are now able to grow at least in line with the general rate of inflation, as the national economy recovers slowly in a low interest rate environment.

By contrast, in less affluent areas of the South East, such as Slough, Portsmouth or the Medway, price fluctuations are more in line with the national average, at 20% below their pre 2007 levels on an inflation-adjusted basis. Meanwhile, in their northern equivalents of, say, Hull and Middlesbrough, prices have continued to drift downwards and are over one third below where they were five years ago in real terms.

The question for these less affluent markets over the next five years will be how far prices have to adjust in real terms, and the extent to which this leads to further nominal house price falls. We believe that underlying rental levels may provide a clue here as income yields if not the prospects for capital growth, eventually encourage transactions.

Taken from
Residential Property Focus Q4 2012