UK Property - Housing Market to weaken in 2010, but don’t expect Armageddon says Knight Frank

Knight Frank UK housing market forecast, October 2009 edition

Headlines

· House prices will end 2009 2% higher than at the start of the year, with the recovery being led from London and southern England

· The current out-performance of the prime London and country house markets will continue, with price growth continuing next year

· The mainstream UK market is likely to see modest price falls in 2010, before a limited rise in 2011 and a more concerted recovery in 2012

Commenting on the latest prime central London figures, Liam Bailey, head of residential research said:

MAINSTREAM UK

“The excitement caused by rising prices in recent months has hidden the fundamentals that have contributed to this performance – particularly the degree to which the affluent and equity rich have led the market.

“There are good reasons why we ought to expect a slow down in price growth, with prices even falling in 2010. However we believe that this reversal will follow a more benign scenario, rather than a more cataclysmic alternative.

“A weak economy will feed through to lower household wealth and both the ability and willingness to bid up house prices. Continuing growth in unemployment, allied to wage freezes and tax rises, and a rise in average mortgage rates will force a number of sales which, in the absence of greater depth of demand, will see prices slipping back.

“However we believe that price falls will be capped at around 3% in 2010. It would be wrong to expect a continuation of the current rapid recovery in the housing market, the economy is not in a position to permit this in the short-term. Similarly, it would be wrong to expect carnage.

“Real demand is strong, supply in the wider market and the new-build sector is very low and we are unlikely to see a rapid shift away from a low interest rate environment.

PRIME LONDON AND COUNTRY MARKETS

“While the prime markets (£500,000+ in the regions and £1m+ in London) have led the recent price recovery, this, in our view, does not make them more at risk of price falls next year. Resilient household wealth at the top of the market has had a direct and positive impact on liquidity in this segment.

“We believe that the future improvement in market conditions will continue to be led from London and southern England, particularly from the higher price brackets.

“Strong demand from UK and international buyers will ensure that the central London property market, in particular, will continue to outperform in 2010.

“However, the central London market will not entirely escape the future uncertainty we are forecasting for the mainstream UK market, and recent strong price growth is unlikely to be maintained. However the positive factors underpinning the capital’s prime market should serve to ensure that price falls are avoided next year.

“Our forecast points to annual growth of 3% in central London prices in 2010, with a steady increase in this rate to 9% in 2011. The aggregate growth we are forecasting for central London in the five years to 2014 is 38%, compared to 19% for the UK mainstream market.

“The key reasons for our confidence with regard to this market are: uniquely in the UK - London will benefit from the global economic recovery, which is likely to considerably outpace that seen in the UK; Sterling is set to remain relatively weak into the medium-term, encouraging international demand; the economic prospects in central London are brightening more rapidly than elsewhere in the UK.

“The market for farmland is set to remain bullish with prices expected to double to £10,000 per acre by 2015. A lack of farmland for sale coupled with strong demand will continue to push up prices. Demand is already strong from UK farmers looking to expand their businesses, but interest from lifestyle buyers and investors will also start to grow as the economy recovers. As the world's population grows food security will become more of an issue and this will be reflected in global soft commodity and agricultural land markets.

“The recession in the house-building sector means that a significant undersupply of housing is emerging across the whole of the UK; but nowhere is this more pronounced than in the central London boroughs, where housing starts have collapsed by over 50% since 2007.

“Our experience in this sector confirms that London’s developers are making considerable efforts to try to bring new schemes forward to capitalise on tight supply in the market and to capture future price growth.”

Courtesy: Knight Frank Residential Research