As we approach the end of the current housing market cycle, there has been a gradual narrowing of the North-South house price divide. Over the past five years, prices in London have risen by 10%. This compares with increases of 37% in Wales and 28% in Yorkshire & the Humber.
2023
Economic disruption seems set to pause the regional price moves we would expect at this point in the cycle. In fact, we do not expect much variation in price growth across the regions in 2023. The areas where growth has been strongest over the past two years may be more susceptible to small price falls. These include the three Northern regions and the Midlands. Wales and Scotland have the potential to weather the storm better than most other regions. Affordability is less stretched here, and a larger share of homeowners are mortgage-free.
We expect prices in Greater London to remain flat in 2023, despite sluggish growth in 2022. Households will be held back by higher interest rates: due to high prices, mortgaged owners in the capital will be particularly mindful of rising rates. As a result, the gap between prices in London and other regions will be at its narrowest for some time.
Prime Central London (PCL) may prove to be an anomaly, given the lack of growth in this market over the past five years. Fewer affluent homeowners rely on mortgages, and if sterling continues to weaken against other currencies, London property will become cheaper for international buyers. In the past, such investors have viewed property as an inflation hedge. We forecast that PCL prices will rise by 1.5% next year.
Since 2008 prices in the North East have risen by 25%. Given this is a third of the average national increase, we have been expecting a pick-up in this region for a while. But the cost of living squeeze is likely to hit households in this region hard. This will delay recovery.
2024
The pandemic-fuelled race for space since Covid has dampened demand for London property, while driving other markets. But this pattern is set to change in 2024. As the current cycle comes to an end in, we expect to see price growth of 1.5% to 3.0% in almost all regions. The North East, however, may lag behind because of the potential for higher unemployment.
This is the point where we forecast that London house prices will begin to marginally outperform other regions. We expect growth of 3.0% in 2024, buoyed by a 5.0% jump in PCL. The South East should be close behind with a rise of 2.5%.
2025
We think the next house price cycle will be characterised by an acceleration in price growth across the regions as interest rates fall back to their new normal. London will lead the way. However, the increase in flexible working, part at home, part in the office, seems set to strengthen the links between the capital and the Southern regions. Their price performance is likely to track that of London more closely in the future.
Prime Central London is likely to be the top performing location in 2025, with an upward move of 6.0%. We also expect to see a pickup in the North East as its economy recovers.
