North-South house price divide set to narrow, says Savills

The latest UK house price forecasts from Savills expects the north-south property value gap to continue to shrink over the next five years, as affordability constraints slow price growth in the more expensive markets closer to London.

Savills has revised its five-year prime and mainstream residential forecasts. The business predicts that UK mainstream house price growth is expected to be 3.5% next year as robust economic growth and a shortage of homes available to buy continue to support prices.

The north-south divide in mainstream house prices is set to close further with total five-year price growth of 18.8% in the North West and Yorkshire and Humber outstripping the 5.6% and 10.4% expected in London and the South East, respectively.

Prime central London is projected to outperform all other prime and mainstream markets after a long period of sluggish growth.

Housing transactions is expected to fall back to normal post GFC levels after 2022, after hitting a projected 1.5m in 2021.

Average UK house prices are forecast to rise by 13% over the next five years; less than the growth seen in the 16 months since the market reopened after the first lockdown.

Lucian Cook, head of residential research at Savills, commented: “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% at the end of June to 1.7% 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.

“However, while latest indicators from RICS and TwentyCi suggest that demand has softened, supply coming to the market has also been constrained. This, combined with relatively low unemployment rates coming out of a recession, means we expect to see a softer growth as opposed to something more dramatic.”

“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.”

Table 1: Mainstream forecasts and Economic Assumptions*

2022 forecast 2023 forecast 2024 forecast 2025 forecast 2026 forecast 5 years to 2026 forecast
UK House Price Growth +3.5% +3.0% +2.5% +2.0% +1.5% +13.1%
Transactions (m) 1.24 1.14 1.09 1.09 1.09
GDP Growth (whole year) +5.8% +2.4% +1.7% +1.7% +1.6%
Unemployment (year-end) 4.4% 4.2% 4.0% 3.8% 3.8%
Bank Base Rate (year-end) 0.5% 0.75% 1.0% 1.25% 1.5%

Source: Savills Research, Oxford Economics

Regional outlook

All regions have experienced upward pressure on prices since the market reopened in June 2020. Prices peaked at 9% growth in 2021 – with markets further away from London performing the strongest. After an exceptionally strong year, softer growth is forecasted for 2022 (+3.5%).

“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,” says Lawrence Bowles, director of residential research at Savills. “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.”

“The potential for price growth looks more constrained in the London mainstream market (+2% predicted in 2022), which has become increasingly confined to more affluent households. 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.”

Table 2: Mainstream residential forecasts

Current Average (Yr to Jul-21) 2022 2023 2024 2025 2026 5-year


Average value in 5 years (f)
North West £229,572 4.5% 4.0% 3.5% 3.0% 2.5% 18.8% £272,732
Yorkshire and The Humber £224,257 4.5% 4.0% 3.5% 3.0% 2.5% 18.8% £266,417
Wales £212,912 4.0% 4.0% 3.5% 3.0% 2.5% 18.2% £251,662
North East £181,001 4.0% 3.5% 3.5% 3.0% 2.5% 17.6% £212,857
East Midlands £252,943 4.0% 3.5% 3.0% 2.5% 2.0% 15.9% £293,160
West Midlands £264,697 4.0% 3.5% 3.0% 2.5% 2.0% 15.9% £306,784
Scotland £198,998 4.0% 3.5% 3.0% 2.5% 2.0% 15.9% £230,639
South West £341,971 3.5% 3.0% 2.5% 2.0% 1.5% 13.1% £386,769
South East £439,813 3.0% 2.5% 2.0% 1.5% 1.0% 10.4% £485,553
East of England £380,685 3.0% 2.5% 2.0% 1.5% 1.0% 10.4% £420,276
London £676,124 2.0% 1.5% 1.0% 0.5% 0.5% 5.6% £713,987
UK £327,838 3.5% 3.0% 2.5% 2.0% 1.5% 13.1% £370,785

Source: Savills Research, ONS

The prime market (broadly the top 5%-10% by value)

By contrast, the prime central London market continues to offer good value for money, in a historical context, and is expected to benefit in the medium term from an increase in overseas demand as international travel picks up.  They will join the UK buyers and UK-domiciled international buyers who have begun to act on the opportunity, which has already seen values bottom out.  Prices are expected to increase +8% in 2022, and +23.9% by 2026.

After seven years of falling values, totalling -20%, property in the capital’s most prestigious postcodes is overdue a recovery, Savills reports.  “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, suggests growth is likely to become more balanced, both in terms of location and property type, going forward,” Frances Clacy, research analyst at Savills, comments.”

London’s domestic prime markets, which encompass high-value homes in locations such as Chiswick and Putney are also expected to outperform the mainstream with growth of +13.5% over the next five years.

“Less reliance on mortgage debt means less exposure to rate rises in a part of the market also likely to benefit from a trickle effect out of central London,” says Clacy.

Beyond London, Savills expects to see changes in working patterns underpin demand in more rural areas further away from major employment centres, albeit to a lesser degree than over the past 18 months. In prime regions prices are expected to grow +4% next year, and +19.3% over the next five years.”

Table 3: Prime residential forecasts

2022 2023 2024 2025 2026 5-year
Prime central London +8.0% +4.0% +2.0% +4.0% +4.0% +23.9%
Outer prime London +4.0% +3.0% +2.0% +2.0% +2.0% +13.7%
UK prime regional average +4.0% +3.5% +3.0% +3.5% +4.0% +19.3%

Source: Savills Research

Rental market bounce back

The first eight months of 2021 saw the rush to the country start to reverse as tenants returned to urban settings, and rents returned to annual growth in markets such as Manchester, Birmingham and Edinburgh. The return of young workers and students to cities has pushed up tenant demand, with rental stock falling.

As a result, while average London rents were lower in August 2021 than in 2020, the capital saw the second-fastest monthly rental growth after Northern Ireland.

Beyond this short-term recovery, Savills expects rents to resume their long-term correlation with income growth. That means UK rents are expected to rise by 19.9% over the next five years, in line with expectations for incomes. Due to the strong recovery in London, the five-year outlook is somewhat higher. Here, Savills predicts rents to be 22.2% higher at the end of 2026 than where they are today.


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