Property

Average house prices forecast to decline in 2020, say Chestertons

Warren Lewis
|
29th November 2019
house prices 5

International estate and lettings agent, Chestertons, review this year's housing market and share their predictions and forecasts for 2020.

Overview

The national housing market has proved remarkably resilient this year - despite the distractions of Brexit, worsening affordability and a shortage of properties coming onto the market - and the number of sales across the UK in the first nine months of the year were only 1.1% lower than in the same period in 2018.

Sales have been underpinned by an economy which has defied predictions of recession and instead delivered record employment and sustained real wages growth. Low mortgage interest rates, lower Stamp Duty and the Help-to-Buy scheme have also helped to boost the number of first time buyers entering the market, and loans to these buyers reached a 12 year high in August.

The imminent General Election is arguably the most important in a generation. It will determine whether, when and how we leave the EU and could have considerable impact on the economy and the property market. ttWhether leaving or remaining, bringing Brexit to a conclusion will remove much of the uncertainty that has stifled investment in the national economy and the London property market in particular.

Deal or No Deal

Leaving with a No-Deal would likely see further falls in both the stock market and sterling in the short term and a loss of business and household confidence.

The key implications for the residential market are how interest rates, job security and wages growth respond, which will have a knock-on effect on consumer confidence and household spending. In this scenario, property sales and prices would likely suffer falls. Assuming we leave the EU with a “reasonable” deal, the market could stabilise quite quickly, however affordability, supply and Government policy issues, such as tax and regulations on planning and the private rented sector will determine the scale and pace of recovery.

UK Price Growth Forecast

Houses prices are still increasing across the UK but the rate of growth has slowed from 4.3% in January 2018 to 1.5% in January 2019 and stood at 1% at the end of September. We expect average prices to fall very slightly next year before recovering in 2021 and enjoying moderate growth in the following years.

The London outlook

In contrast to the national market, prices and sales have been falling in London for several years: according to the Land Registry, annual price growth has been negative for the past 19 consecutive months and the number of properties being sold every year has been falling since 2014.

Having fallen by around 20% over the past five years, values in central London are now looking very attractive to buyers, especially overseas buyers taking advantage of the weaker pound, which fell to a 34 month low in early September. Allowing for the combined effect of the drop in prices and sterling, a property costing £1.5m in July 2014 could now cost around £775,000 – a discount of just over 48%.

This triggered a strong increase in buyer interest in the second half of 2019, predominately from owner-occupiers whose reasons for moving are typically needs-driven and therefore cannot be placed on hold indefinitely. Buyers are also able to take advantage of low mortgage interest rates, which have fallen even further in recent months.

Looking ahead, a conclusion to Brexit could see the high end London market recover quite quickly as there is considerable unsatisfied buyer demand which has built up over several years. London remains a highly attractive location for international buyers who intend to hold onto properties for the long term. Its transparent property law, clear title on property and safe haven status are undiminished. London also offers a world-leading combination of business opportunity and cultural/leisure pursuits within a safe and tolerant environment.

It will remain high on the list of destinations for flight capital, as we have seen in the past following the Arab Spring turbulence and France’s wealth tax hikes of a few years ago. Most recently, the capital has attracted investment from wealthy Hong Kong residents.

London house price growth forecasts

There have already been some encouraging signals coming from the higher value central London locations, which often lead the market in terms of both price falls and price recoveries: prices have generally stabilised and, in some locations where demand is especially strong, prices are creeping up again. We anticipate a more widespread return to price growth across central London next year, although increases are likely to be moderate at around 2%.

The wider London market is likely to experience further decline in both sales and prices, regardless of the Brexit outcome. Despite a range of government initiatives, housing supply is likely to remain insufficient to match demand and many housebuilders are already reducing their supply pipeline, which suggests that whilst prices may experience further decline, they are unlikely to crash.

London rental market

London’s rental market is suffering from a shortage of properties and increasing demand from tenants is consistently outweighing supply. However, despite the significant increase in tenant demand, the high cost of renting is limiting tenants’ ability to pay any more than they currently are and average rents in London’s higher value locations are only stable or recording slight increases. Over the 12 months to September, the Chestertons Index recorded an increase of 2.3%.

Affordability remains an issue and even in locations where supply is severely limited, tenants have been price sensitive. These affordability issues act as a partial brake on rental growth, and at the beginning of October, 28% of properties available to rent in central London had experienced a reduction from the original asking rent.

The more affordable rental locations – Zone 3 and beyond – and which have good transport connections to the major employment locations of the West End, City and Docklands are likely to experience the strongest rental growth in 2020 and beyond. Rental growth in these locations should remain above inflation, driven by a rising population, many of whom will continue to be “forced renters”.

Following the seasonal pattern of previous years, lettings demand in the higher value locations is tailing off as we approach the end of the year. Corporate tenants account for a sizeable proportion of the central London market and there has been an undoubted increase in nervousness since the referendum, notably within the banking and financial services sector. Brexit will have a negative impact but indications so far suggest the exodus of staff will be far less than originally feared.

We expect demand to pick up again in the New Year while the supply of properties available to rent is unlikely to increase at the same rate. This suggests that rents should stabilise or rise in more locations over the course of next year, although any increases are likely to be moderate.

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