Savills released its five-year house price forecast and projected house price growth in 2023 at three per cent, then 2.5 per cent in 2024, two per cent in 2025 and 1.5 per cent in 2026.
As a result, UK house prices could be up by 13.1 per cent by 2026. This is less than the growth experienced in the last 16 months, according to the report.
Housing transactions would fall back to normal post-global financial crisis levels, after hitting a high of 1.5m in 2021, with a projected 1.24m of transactions in 2022 and then falling gradually to 1.09m in 2024 onwards.
Lucian Cook, head of residential research at Savills, said: “After such intensity in the market and without the imperative of a stamp duty holiday, we know that there’ll be less urgency in the market from 2022. Indeed, we have already seen three-month on three-month house price growth slip back from 3.9 per cent at the end of June to 1.7 per cent at the end of September.
“With the prospect of inflationary pressures persisting into next year, bringing forward the first anticipated interest rate rise, we expect price growth in the near term to be somewhat more muted than we have seen of late.”
He added that whilst there were indicators that demand had softened, supply was still constrained, and combined with low unemployment would lead to softer growth.
Cook added: “With gradual interest rate rises expected, we expect the mortgage regulation introduced back in 2014 to show its hand more clearly over the next five years. Stress testing of affordability has meant that existing borrowers are unlikely to get into financial trouble as rates creep up.
“But it will cap how much new buyers can borrow relative to their income in a higher interest rate environment, acting as a drag on both prospective price growth and market activity over our forecast period.”
The report said that the base rate by year-end 2022 could be 0.5 per cent and rise gradually to around 1.5 per cent in 2026.
From a regional perspective, the North West and Yorkshire and the Humber could see an 18.8 per cent change in house prices in five years, with Welsh house prices expected to grow around 18 per cent by 2026.
London is expected to have the lowest growth at around six per cent in the next five years, whilst South East and East of England house prices are predicted to grow by around 10 per cent by 2026.
Lawrence Bowles, director of residential research at Savills, said: “Given where we are in the housing market cycle, the north-south divide in house prices looks set to close further over the next five years.
“There remains more of an affordability cushion beyond London and the South. The Government’s levelling-up agenda has the potential to accelerate a rebalancing of the market, but only if it gains meaningful traction.”
He added that the potential for price growth was more constrained in the London mainstream market, with two per cent growth predicted in 2022 and it will be confined to more affluent households.
Bowles explained: “This reflects the extent to which London prices became dislocated from the rest of the UK housing market through strong price growth from 2005 to 2016, something so pronounced it is expected to still limit price growth across large parts of the capital a decade later.”
However, the report said that the prime central London market will benefit medium term from growing overseas demand as international travel resumes.
It said that prices are expected to rise by eight per cent in 2022 and by almost 24 per cent by 2026.
It added that London’s domestic prime markets would outperform mainstream growth by 13.5 per cent in the next five years.
Frances Clacy, research analyst at Savills, said: “We’ve already seen the beginnings of this recovery, primarily driven by demand for larger houses and, as such, by locations such as Notting Hill and Holland Park.
“But, renewed demand for flats during the second half of 2021, particularly from those looking for a pied-à-terre, suggest growth is likely to become more balanced, both in terms of location and property type, going forward.”
She added that less reliance on mortgage debt would mean less exposure to rate rises.
Overall, the report noted that prime region prices would increase by around four per cent next year and by over 19 per cent in the next five years.
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