Savills has halved its forecasts for house-price growth over the next five years. It now expects house prices to rise just 6 per cent in the UK mainstream (non-prime) market between 2012 and 2016. With inflation, that equates to an 11 per cent loss in real terms. "Inflation, rather than price falls, will erode housing value," said research director Lucian Cook.
The estate agent's research team is taking its lead from economic forecasters, who have consistently downgraded their expectations for UK growth this year. Wage growth, which depends on economic growth, is a key driver of house prices. The other main driver is mortgage availability, particularly for first-time buyers, which remains almost as limited as it was two years ago.
But, unlike some commentators, Savills is still ruling out significant house price falls. That's mainly because low interest rates have protected homeowners from the forced sales and repossessions that knocked the housing market of the early 1990s. Homeowners are simply staying put, depressing transaction levels but putting a floor under prices - if only in nominal terms. "We don't think the mechanisms for falls are in place," says head of residential research Yolande Barnes.
Savills still expects London to lead the recovery, but later than it previously forecast. It now thinks mainstream London prices will flat-line for two more years before starting to recover in 2014. At the other end of the spectrum, it expects house prices in the North East, already 13.3 per cent off their peak, to be a further 3.1 per cent lower by 2016.
There are two bright spots in the housing market. The first is prime central London, where price growth has exceeded even the most optimistic estimates over the past year. The other is rental growth. Tight supply combined with an influx of households into the private rented sector has pushed up rents across the country this year. Encouragingly for buy-to-let landlords, Savills expects the trend to continue with rental growth of 20 per cent over five years.
Given this outlook, it may seem odd that Alternative Investment Market (Aim)-listed supermarket developer Terrace Hill put its residential joint venture on the market this week. But debt explains the decision. The joint venture has to repay another tranche of debt next September and, having tried but failed to turn the portfolio into an institutional fund last year, it has little choice but to sell. Who buys, and at what price, will indicate just how far corporate investors believe such bullish rental forecasts.
