FORECASTING THE REGIONS
London is likely to underperform until the cycle comes to an end in 2024…
Annual house price growth in London slowed from 5.1% in June to 2.2% in July. The capital has been the weakest performing region and we expect this to continue until 2024, as a result of stretched affordability and the rise in flexible working which is encouraging households to leave the city.
In theory, the ending of the stamp duty holiday should deal the hardest blow to London. Until June 30, buyers were able to save as much as £15,000. Yet conditions have not significantly altered since that time. The average seller in London achieved 99.1% of their asking price in September, up from 97.3% in September 2019.
But, due to the reasons outlined in our wider forecasts, we still expect the rate of growth in London to slow, ending the year up 1.5% on 2020. We expect a rise of 1.0% in 2022 and a further rise of 1.5% in 2023, as the price gap between the capital and the regions continues to narrow.
In 2008, the average London house price was 59% higher than the national average. This gap widened to a peak of 117% in 2016, but has since shrunk to 94%. By 2024, it should have reduced further to 84%.
However, 2024 is likely to mark a turning point for London as a new cycle dawns. Prices in the city are set to rise by 3.0%, outpacing the national average for the first time in nearly a decade. But subsequent increases are unlikely to be as steep as those seen in previous cycles.
The pandemic has delayed Prime Central London’s recovery this year, and its impact will weigh on future growth…
The resumption of international travel is key to the market in Prime Central London (PCL), since 45% of buyers in 2019 were overseas nationals. As the global vaccine roll-out progresses, we expect more people to travel to PCL and return to work or live there, giving the market a modest boost.
But while transactions are set to rise next year, even though prices in PCL are still 11% below their Q2 2014 peak, we do not foresee a substantial rebound that would return prices to this level. The 2% overseas stamp duty surcharge and 3% second home surcharge will continue to limit growth. Instead, we think prices will rise 1.0% in 2022, 2.0% in 2023, before an acceleration to 4.0% in 2024.
Southern markets have been the biggest beneficiaries of London outmigration, but affordability will bite…
In our view, the popularity of flexible working – which enables people to live further from the office – will continue to fuel the locations bordering the capital.
However, house prices in these areas were already expensive before the pandemic, and strong growth in 2021 has exacerbated this. In the second quarter of 2021, prices rose by 8.6% in the East of England, by 8.5% in the South East and by 10.8% in the South West. Yet they have still been outpaced by regions in the North as is typical at this point in the cycle and there are signs that price growth is slowing.
Slow growth in incomes will limit price increases in the South. Over the next four years, we expect prices to rise by 11.0% – 12.5%. As the biggest beneficiary of London outmigration, the South East is set to see the strongest price growth.
The gap between prices in the East and South East and the national average may have widened since 2008. But the average price in the South West will end the cycle 8% above the national average – near the level recorded in 2008.
House prices in the Midlands will set the tone for price growth across Great Britain…
House prices in the Midlands have already returned to their level at the start of the cycle. In 2008, the average price in the East Midlands was 17% below the national average. Today that gap remains the same and we expect no change until the end of the forecast period in 2024.
Over that time, house prices in the East and West Midlands are likely to rise in line with the national average. Despite double-digit growth in 2021, we expect the pace to moderate to 4.0% in 2022 and 3.0% in 2023.
Price growth in Northern regions will continue to outpace the wider national average as the regional gap narrows…
There has been double-digit growth in the first and second quarters of this year in Northern regions. However, the average price in the North East has only recovered to its pre-financial crash peak this year.
We forecast that prices in the North East will rise by 21.5% over the next four years, making it the top-performing region. But by 2024, the average price in the region will still be 41% below the national average, unless economic growth in the regions picks up pace.
Prices in the North West and Yorkshire & Humber are set to be around 16% higher by 2024, as affordability in these regions is easier than in the South.
Scotland & Wales have been some of the most competitive markets this year…
In July, more than 40% of homes that sold in Scotland and Wales had received three or more offers. In the second quarter price growth in Wales was 15.5% and 10.0% in Scotland, in each case the fastest pace of growth since 2007.
The gap between Wales and the other regions has narrowed. Scotland still has some catching up to do however, which is why we forecast the region will be the second strongest performer over the next four years. By 2024, the average price in Scotland is set to be 20.0% higher than today.
In 2008 the average price in Scotland was 21% below the national average. This has widened to 36%. But by 2024, it should narrow to 30%.
We forecast prices in Wales to rise 17.0% by 2024, despite the increase in the second home stamp duty surcharge from 3% to 4% at the end of 2020.