This issue describes a UK housing market that is diverse and fragmented, where conflicting signals on activity and price growth confuse those who are trying to put together the jigsaw puzzle of house price forecasts. Download here.

There is still disagreement on past performance, let alone future performance. This is dependent on which part of the country you are standing in – whether focused on mortgage lending or cash transactions, looking at affordability or price sustainability.

It is a mistake though to think, because house prices are more expensive for the average household than they used to be, that market values have to come down.

High house prices have excluded households from owner occupation, but increased incidence of renting means transactions have shrunk rather than prices. The UK housing market is now the preserve only of the wealthiest 50% of households – and only if they have access to sufficient capital to use as a deposit.

Despite this, our analysis shows the housing market is not in bubble territory and could see as much as 25% growth over the next five years without significant damage to those household finances. But this doesn’t rule out the possibility of a future bubble developing if scarcity value leads to the ‘irrational exuberance’ seen in so many past cycles.

The future of the housing market then starts to revolve around where the money is. If cash is not being generated by households, their power to participate in the owner occupied market is severely limited. This is why London has seen so much activity and growth of late while even prime properties in the country still stagnate.

London isn’t the only city ‘rock’ to which homebuyers have been clinging like limpets. Real estate price growth around the world has been an urban phenomenon, focused on the high-performing urban economies and rarely extending beyond major cities. Rural and resort locations in Asia, for example, have underperformed city properties and the recent recovery in the US is particularly focused on prime properties in major urban centres.

Understanding this helps us to understand the UK. It is the improvement in the regional economies and the movement of people from London to areas that are clearly in recovery that will prise the molluscs from their world-city foothold. We believe 2014 will be the year of the southern ‘ubertowns’ and the time when the London-rural prime price gap will start to close.

How far and how fast the London ripple moves out depends not only on economic factors but also on political ones. Prime properties and London stand to be affected by political change so we expect a hiatus in activity and price growth in the run up to the 2015 election. Different political forces apply to Scotland’s independence vote in 2014 but, again, uncertainty can suppress market activity.

UK housing is facing a dichotomy of opposing forces. It will be more difficult for ‘Help to Buy’ measures to counteract the negative forces of credit scarcity, lack of cash and political uncertainty – but 2014 is probably the year it starts to do so.

Taken from
Residential Property Focus Q4 2013

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