The performance of the UK housing market over the past 10 years has been uneven in more ways than one. According to the Nationwide index, annual UK house price growth over this period peaked in the second quarter of 2014 at 11.5%, and at its worst fell 16.5% in the year to the end of March 2009.

Over this 10-year period total net price growth has ranged from just 1% in the North East to 70% in London.

Across the decade, we have seen four distinct phases of a cycle. Understanding each phase helps 
us understand what might happen 
next and the constraints on future house price growth in different parts 
of the country.

Lessons from history

From the beginning of 2005 to the third quarter of 2007 we saw unexpectedly strong house price growth and buoyant transaction levels, following an extraordinary period of house price growth from 2001 to 2004. The economy appeared in good health, especially in London and the South East, interest rates and inflation were under control and mortgage finance was freely – too freely in hindsight – available.

As the credit crunch unfolded over the next 18 months, we saw an unprecedented combination of falls in values and transaction levels. This was quite different in nature from the downturn of the mid 1990s, the only parallel being the speed at which confidence drained from the market.

Between the first quarter of 2009 and the second quarter of 2010 we saw a short-lived recovery in prices, facilitated in part by historically low interest rates.

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Rapid recent recovery

Then, nearly six years after the beginning of the credit crunch, the market sparked into life. There was a rapid recovery in prices, not just in London, but most significantly so there. Transaction levels and mortgage lending picked up as confidence returned to the market and those buyers able to do so took advantage of low interest rates as the economic outlook improved.

Loan to income ratios have been on a long term upward trajectory, but have risen rapidly, particularly in London and among first time buyers, facilitated by low costs of borrowing.

"Constraining factors cap the prospects for price growth across the UK"

What next?

Where does that leave us in the next phase? On the one hand, the economic recovery is likely to become more widespread. On the other, interest rates can only go one way, putting pressure on mortgage affordability. Our view, however, is that rate rises are unlikely to be severe enough to trigger a wholesale housing market correction.

Furthermore, while there is little sign that the housing supply shortfall – at its most acute in London and the South East – will be met by a sufficient increase in housebuilding, mortgage regulation will restrict people’s ability to get on or move up the housing ladder, whatever the banks and building societies may aspire to lend.

These constraining factors will cap the prospects for price growth at a national level, particularly after the unexpectedly high levels of house price growth seen in 2014. Across the UK we expect prices to rise by 19.3% in the five years to the end of 2019 on a nominal basis, meaning that after inflation, real house price growth will be marginal.

Constraints on price growth are most likely to be felt in London, given where pricing sits after a prolonged bull run. There is already evidence of a change in sentiment among buyers who are increasingly aware that the housing market in the capital looks fully priced. Following evidence of a shift in the balance of supply and demand from the RICS, the Nationwide House Price Index reported rises of just 0.2% in the third quarter of 2014.

On affordability grounds alone there is limited capacity for house price growth in the mortgaged part of the London market over the next five years. A period of sustained low price growth is needed to rebalance the market. At the other end of the scale, there is more capacity for price growth in the North East, though the economic drivers for it to be realised are weak.

Against this context, we expect 
the South East to see the highest levels of house price growth over the next five years and London the lowest, with buyers priced out of one moving to the other.

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The bigger picture

However, this is only one part of a much bigger picture. Over the next five years we expect the housing market to undergo further structural change, in terms of the mix of transactions, the way existing housing wealth is recycled and the balance between renting and owner occupation.

Taken from
Residential Property Focus Q4 2014