UK house prices will not regain their 2007 peak until 2019, making this the longest housing market recovery on record – and a further ‘correction’ in prices looks inevitable.
Knight Frank issued a new housing market forecast this morning, which also said that although housing transactions will edge up by 2% next year, sales will remain at ‘well below peak levels’ for the whole of the rest of this decade.
The firm is also forecasting that the London property price boom will end next year. It says that expected tax changes will cast a shadow on the prime central London market next year, with no price movement expected in 2013.
Gráinne Gilmore, Knight Frank’s head of UK residential research, said: “Some five years after the start of the financial crisis, the housing sector in the UK still does not bear the hallmarks of a fully functioning market.
“Transaction levels have roughly halved since the last market peak in 2007, and are 35% below the 20-year average, as first-time buyers and those further up the housing ladder struggle with tighter mortgage lending rules.
“House prices have been flat or modestly declining across the UK since 2010. This stasis is underpinned by unusual economic conditions, rather than a genuine equilibrium in the market.
“The fundamentals suggest that a further correction in prices is needed, as the relationship between average earnings and average house prices is well above the long-term average.
“We believe that the new ‘average’ at which this ratio settles in the future may be above the historical average, but there is still a further readjustment required to reach that level.”
She went on: “Prices have been supported so far by ultra-low interest rates. This has resulted in monthly mortgage payments falling for some borrowers.
“But it has not all been good news for borrowers. Those with only a small slice of equity in their property have struggled to remortgage, given that many lenders have scrapped the high loan-to-value (LTV) deals seen before the financial crisis. Instead, lenders in general now lend a maximum of 75% LTV. Only a handful of deals are available above this threshold and the most competitive deals are for those who have 30% or 40% equity.
“Indeed, most home owners who do not have a 25% chunk of equity in their property must stay with their current lender, and are unable to reduce their monthly mortgage payments by shopping around the mortgage market for a more competitive deal.
“First-time buyers without a 25% deposit find it hard to climb on to the housing ladder at all, although some government initiatives, such as Firstbuy and NewBuy, have tried to open up the market to those with more modest deposits.
“The Bank of England and Treasury Funding for Lending scheme, designed to boost mortgage lending as well as the availability of loans to small businesses, has yet to prove that it is really having a significant effect on the market, although there are initial signs that mortgage rates may have fallen slightly.
“The recent Mortgage Market Review (MMR), which is likely to be implemented in 2014, underlines the fact that the current conditions in the mortgage market are not a post-crisis blip. Rather, this should be considered the ‘new normal’, and the housing market will certainly reflect that, taking years to reach the transaction levels seen at the peak of the market. We forecast only a 2% rise in transactions next year.”
She concluded: “We do not see average prices reaching their 2007 peak again until 2019 – which would mark the longest period between price peaks in more than 60 years. Once inflation is stripped out, average UK house prices are unlikely to hit 2007 levels again in real terms until 2031.”