Cambridge is growing at a fast pace. House prices have risen rapidly since 2013, with growth rates on par with London, driven by robust employment growth and a strong local economy.

Our analysis shows that price growth in Cambridge has reached new heights. House prices are now 49% above their 2007/08 peak. Between February 2013 and February 2016, average prices increased by a total of 40.7%. With an overall average property price of £491,387, Cambridge has overtaken Oxford for the first time.

There is also growing evidence that house price growth is extending its reach into South Cambridgeshire, where over 50% of all residential property transactions are valued above £300,000.

Whilst house prices continue on an upward trajectory, affordability pressures are still mounting making it even harder for buyers to get on the property ladder.

Affordability pressures

The median salary in Cambridge is £30,700, whilst in South Cambridgeshire it is £32,680. With a median house price to income ratio of 12.8 in Cambridge (8.4 in South Cambridgeshire), homeownership is increasingly out of reach for many local people.

Even for high-earners, owning a home is becoming difficult. Although upper quartile salaries increased by 2.1% annually between 2008 and 2015 (to £43,000), house prices in Cambridge increased by 7.5% annually over the same time-period. This is in line with London trends, in which salary growth rates are unable to match those of house price growth.

For many, renting privately becomes the only viable alternative. However, with a median rental value of £1,166 for a two-bed property in Cambridge (£860 in South Cambridgeshire), a large proportion of income is required in this market too.

Regardless of tenure, worsening affordability points toward another crucial issue: housing need and supply.

Housing need

According to recent Local Plan evidence, Cambridge and South Cambridgeshire require 1,667 new homes a year, of which 799 ought to be affordable. Current policy levels of affordable housing identified as viable in the Local Plan suggest that affordable housing tariffs should be set at 35% and 30% for Cambridge and South Cambridgeshire respectively.

Based on our own analysis, we therefore calculated that in order to deliver the required number of affordable housing and the appropriate tenure mix, the combined housing target should be set at 2,415 per annum.

This target is 748 homes higher than the current estimate of need. Given the average annual housing delivery rate over the last four years of 1,407, this leaves a shortfall of 1,008 homes a year or over 20,000 across the whole 20-year plan period.

^{Source: DCLG, Savills Research, Peter Brett Associates}

Government policy

In last year’s Autumn Statement, George Osborne announced proposals for 400,000 affordable new homes focused on low-cost homeownership over the term of this parliament. This will include 200,000 Starter Homes, Help-to-Buy equity loans, broader eligibility criteria for 135,000 new shared ownership homes, and an expansion of the definition of affordable housing to include innovative rent-to-buy models.

In Cambridge, values are so high that home ownership is likely to remain out of reach despite the Government schemes. Discount rental products are therefore increasingly important for the Cambridge workforce. Developers and the councils may need to think creatively about how best to meet this sub-market need, and there are signs this has already started with 1,500 new homes at NW Cambridge only available for University employees under a key worker scheme.

Residential demand

Cambridge has established itself as a global city, and as such consistently attracts people for its employment opportunities. The knowledge economy continues to thrive, with employment playing a significant role in driving demand across Cambridge’s sales and lettings market.

Savills data highlights that employment has been a major driver of demand in the prime lettings market over the last three years. Two-thirds of tenants stated their reason for renting as employment relocation, with a further 29% stating lifestyle relocation.

^{Source: Savills using HM Land Registry Data}

^{Source: Savills Research}

Employment, particularly in science and technology, is also a principal driver across the sales market. Our data shows equal demand from buyers employed in this sector across all price-bands, reflecting the spectrum of salaries in the science and technology sector in Cambridge.

Meanwhile, in the high value market, most buyers of properties worth over £1million work in the finance and insurance sector. These buyers are more likely to commute further afield, with 33% between 2013-15 stating London as their employment location, according to our data.

This ripple effect of money moving from the capital is consistently bringing wealth into the Cambridge market, pushing up values in sought-after neighbourhoods. As a result, Newnham, the most expensive area, had an average sale price in 2015 of just under £1million.

Although Cambridge remains predominantly a home-grown market, over the past five years the proportion of international buyers purchasing prime property has been increasing. Most significantly, the nationalities of these buyers have diversified, with the most prominent internationals now Western Europeans and North Americans, accounting for 8% and 5% of all prime purchases in 2015.

With Cambridge’s status as a global city and a world-class University, it is unsurprising that the market is attracting an increasing level of international interest.

^{Source: Savills Research}

New build residential

Beyond the city centre, uncertainty over Brexit, affordability pressures and changes in government policy aimed at buy-to-let investors, have all dampened demand for new build homes in the short term.

Our data shows that the prime new build market in Cambridge has been heavily reliant on investor buyers. Between 2014 and 2015, 69% of purchasers were buying for investment, with 26% purchasing their main residence and 5% buying a second home.

The recent introduction of an additional 3% surcharge on top of stamp duty rates for investors and second home buyers, the phasing out of mortgage interest tax relief for landlords and the fact that residential property was exempt from plans to cut Capital Gains Tax, has all had a calming effect on investor demand. Likewise, the upcoming EU referendum is creating uncertainty for potential investors.

Affordability pressures are also reflected in the higher demand for smaller units, with more affordable one and two bedroom properties making up 76% of our sales in 2014 to 2015.

Whilst moderate demand remains for the smaller, more affordable units, the demand for properties of all types may return once the market has had a chance to settle, and the popularity of the area with families and young professionals is expected to continue underpinning this demand.

^{(Note: Cambridge city only)}

^{Source: Savills Research}

^{Source: Savills Research}