After a prolonged period of outperformance, our new five-year forecast for mainstream London house prices is growth of 15.3%, sitting below that of the UK average and generally reflecting less capacity for further growth.

As of September, values sit 46.0% above the previous peak and are up 10.6% annually according to the Nationwide. The average sale price over the past 12 months was £485,000 and 1 in 12 transactions were over £1m.

But the overall averages hide significant differences between distinct submarkets across the capital. This explains why that price growth will continue to be unevenly distributed across the capital.

A borough by borough review of house price growth shows that the best performers over the current cycle have slowed more recently, and that annual growth has generally been strongest in lower value locations. Annual growth in the four highest value boroughs averaged 0.6% in the 12 months to August; in the four lowest value boroughs the corresponding figure was 12.4%. What clues does this give for the future?

Life at the top

Where boroughs have strongly outperformed the London average over the course of the upswing in prices, we might expect that the scope for further growth is lower.

In prime central London growth has been very strong since 2005, but recent tax changes have stifled market activity and limited price growth. Looking forward growth may remain muted in the short term as the market continues to adjust to the new tax regime.

However the fundamentals of wealth generation are sound, such that prime central London is expected to perform better than the London average over a five-year period.

Bottoms up?

By contrast, in the outer London boroughs such as Bexley, Havering and Barking & Dagenham, values over the cycle have risen far less, so in simple terms we might expect the scope for future growth to be high. Early signals are bearing this out; annual growth in these outer locations is already higher than central areas. We may therefore be reaching the turning point where the lower value areas are set to outperform.

Analysis of past performance shows that the markets of many outer boroughs move more in line with the regions of South East and Eastern England than London. In our regional forecast we predict that these regions will have the most growth over the next five years (21.6% and 21.0% respectively) and expect that price growth in the outer boroughs will be more similar to these regions than the London average over the next part of the cycle.

Explore the interactive map in a new window >>

NB: These forecasts apply to average prices in the second hand market. New build values may not move at the same rate
Source: Land Registry, Savills Research (all ranges given are for borough level averages)

Stuck in the middle

So where does all this leave the areas in between? Values in boroughs such as Camden, Islington, Wandsworth and Hammersmith & Fulham have grown very strongly over the past five years, all now sitting at over 50% above their 2008 peak. But their annual growth is currently well below the London average, with small falls recorded in two of these boroughs.

The potential for further growth in these boroughs is tempered by affordability and accessibility considerations for those heavily reliant on mortgage debt.

The deposits and loan-to-income ratios required for first time buyers and, to a lesser extent, buyers trading up the ladder are very high. Mortgage market regulation and Bank of England lending guidelines have limited access to mortgage finance and left the market increasingly reliant on equity-rich purchasers.

This has subdued transaction levels and we fully expect value increases in the mainstream markets of these locations to be limited in the short term.

Despite lower historical price growth, similar considerations apply in boroughs such as Brent, Haringey, Hounslow, Merton and, further in to the suburban areas, Barnet and Kingston upon Thames.

Particular hotspots may emerge in areas of major regeneration and infrastructure improvements. This may support higher growth in say Ealing, but overall the picture is one of slowing growth. Cash buyers and the continuing supply-demand imbalance will maintain some level of price rises.

East London Bucks The Trends

Four boroughs beat the London average for price growth

Only four boroughs are above the London average both in terms of their annual price growth and where they sit versus their pre-downturn peak: Hackney, Southwark, Waltham Forest and Lewisham. What characteristics do they share that could help explain this? Most obviously they are all situated to the east of the traditional prime locations.

Hackney is often held up as the classic example of gentrification and house price growth occurring in tandem. In the 2015 Indices of Deprivation statistics, Hackney recorded the largest reduction in deprivation (relative to the 2010 results) of any local authority in England, with Waltham Forest also in the top 10.

As prices have risen and made Hackney less accessible to first time buyers – the average house price is £640,000 – Waltham Forest at £389,000 has emerged as a more affordable alternative with similar appeal to young professionals. South of the river a similar trend of priced-out buyers seeking value has seen a shift eastwards from Clapham and Brixton to Peckham and Catford.