Our lead article reports on the potential impact of interest rate rises on the total housing costs both across the UK and at a household level in different regions. It shows that the affordability constraints that are already biting in London are likely to increase over the five-year period of our forecasts.

This limits the capacity for price growth over this period at both a regional and national level. The pattern of price growth will be dictated by the extent of growth while rates remain low and, in turn, how quickly those rates rise.

The growth shown by the mainstream market indices has been stronger in the first six months of 2014 than we would have expected. This leaves less capacity for price growth over the remainder of the period.

This is particularly the case in London, where lead indicators suggest a change in sentiment that is likely to limit price growth over the remainder of 2014.

With sentiment fairly volatile, there is every possibility that London market will see a return to growth through 2015 before meaningful interest rate rises. However, the limited remaining capacity for price growth means any future spikes in house prices would have to unwind, either by way of a price correction or a prolonged period of broadly static prices, and that process could potentially last beyond our forecast period.

There is more capacity for price growth in other parts of the UK, though the timing will be dependent on the regional pattern of economic growth.

Over the period of our forecasts, markets in the South of England are expected to be the strongest performers, with the markets of the Midlands and the North having the potential to outperform these areas subsequently as has been the case in other market cycles.

Click Table 5.1 below to enlarge

Taken from
Residential Property Focus Q3 2014