Headlines

• UK prices to rise by 6% during 2007 and by 3% in 2008
• Northern Ireland and southern England set to outperform into 2008
• Sales volumes to fall 12% in 2008 compared to their 2007 level
• Central London prices to end 2007 32% higher, but annual growth will fall to 3% in 2008
• Prime country house prices to rise by 9% in 2007, but will rise only 5% in 2008
• Prime London rents to rise 14% in 2007 and 9% in 2008
• UK rents to rise 7% in 2007 and 6% in 2008

Market overview

We forecast in October last year that residential prices in 2007 would rise by approximately 6%. Whilst the market was stronger during the early part of 2007 than we had expected, weaker conditions anticipated during the final quarter mean that price growth will end this year close to our initial estimate.

Over the course of 2007 sales volumes have remained high by historic standards, and will end the year around 8% above their long term average. Buy to let activity has remained high, confounding many of the more pessimistic economic commentators, and in many markets investment activity has risen to record levels. Despite ongoing affordability constraints the market has been far more healthy than expected.

The UK market has seen a significant shift in confidence and activity in the third quarter of 2007. The sellers market, which had characterised many parts of the country until the summer, has been replaced very quickly by a buyers market. The new market sentiment means that vendors are having to compete much harder to achieve timely sales and ambitious pricing has effectively ended across the prime and mainstream markets.

Market forecast

There are two schools of thought regarding the longevity of the credit crunch. There are those who think the worst is over, who point to the record levels hit by equity markets across the globe and to the fall in overnight and three month money market rates since the September peak.

The alternative view is that market uncertainty has not disappeared. This more negative view places great store on the fact that whilst debt securitisation was supposed to spread risk, the lack of transparency engendered in the market means in many cases there is no obvious way of assessing where risk may still be concentrated.

The initial impact of the credit crunch is being felt by the City economy. For a period, profitability will be reduced, jobs will be cut and bonuses reduced. The actual quantum of these processes is still uncertain.

Whereas the City economy is experiencing a more difficult phase, the wider economy is performing fairly well. GDP growth is forecast to slow from 2.9% to 2.0% next year, which would represent a fairly benign slow down. Price inflation and earnings growth are easing, and the pressure on base rates has abated.

With the exception of the City economy, the wider picture is relatively positive – and yet the housing market appears from most measures to be hitting a more difficult phase, why? The problem is that affordability is so tight that market sentiment is now hugely important in determining the next direction for the market. Consumer confidence monitors report that people are not worried about significant economic changes, ie loss of employment, but they are concerned about every day issues: cost of living, taxes and the outlook for interest rates for example.

Our current view is that the UK market is likely to enter a weaker phase. The next 12 months will feel a lot like late 2004 and early 2005; a period when price growth slowed to low single digit levels, and more importantly a period when buyers looking to strike deals were met by over-ambitious vendors. We believe that prices will rise next year by 3% and sales volumes will fall 12% on the level seen this year, although they will only be down 5% on their long term average.

The prime markets are likely to perform better than the mainstream markets – but not by a wide margin. Vendors of the very best properties will still be able to name their own price (almost), but for the rest of the market price growth will be noticeably lower than that seen in recent months.

Courtesy: Knight Frank Residential Research

Note on market forecasts

This document contains forecasts on property market performance, it should not be relied upon for entering into transactions without seeking specific, qualified, professional advice. We can take no responsibility for any inaccuracies of the data or forecasts.

Information and queries

If you have any queries regarding anything contained in this briefing note, or would like to obtain additional information on the UK or international housing markets please contact:

Liam Bailey

Head of Residential Research

+44 (0) 20 7173 4966

[email protected]