At the beginning of the year we forecast that house prices in the UK had the capacity to rise in line with earnings over a five year period. The pace of that growth was expected to be loaded towards the beginning of that period, whilst interest rates remain low.

We also forecast that London would outperform the rest of the country in the short term, but that thereafter it would slow considerably given affordability constraints. Accordingly, other markets in the south of the country were expected to perform more strongly than the capital over the five years as a whole.

While this remains our view, the exact pattern of growth over the next five years has become more difficult to predict.

The Nationwide index suggests that prices have risen 4.4% at a national level over the first four months of this year. Combined with a continued imbalance between demand and supply, this suggests that price growth is likely to be higher than the 6.5% that we forecast for the UK in 2014, albeit values in many regions of the UK remain well below their 2007 peak in real terms.

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In the short term, the current pace of growth has become a concern for various economists and think tanks, who continue to highlight the risk of parts of the market overheating
if buyer exuberance is not tamed.

The speed at which that exuberance is reined in depends on a range of factors. These include the market's response to the Mortgage Market Review, the timing and extent of interest rate rises and the potential for the Bank of England to intervene through the use of other macro-prudential tools. In the prime markets political posturing will undoubtedly play its part.

But for most buyers, however, the underlying cost of servicing their mortgage will be the biggest constraint on the amount they can pay to move up the housing ladder. This suggests that any additional price growth that we see in the 
next 12 to 24 months is likely to be offset by weaker performance later 
in the period.

Taken from
Residential Property Focus Q2 2014