Each week seems to heap more bad news on the London residential market. But commentators are more sanguine about the prospects for residential outside the M25 and the South East.
With fewer international buyers, fewer buy-to-let investors and greater affordability, the UK regions are expected to post residential price rises of as much as 20% by 2020. What’s more, these areas will not be as badly affected by international factors as London will be.
Economic fundamentals
According to Lee Layton, research analyst at Carter Jonas, the economic fundamentals of regional housing markets are more sound than those of London. Put another way, these markets are related directly to the UK economy.
“I think London house price inflation will slow to 4% or 5%, provided wages keep growing.
“But the regional markets are built on more solid foundations,” he says.
And although the EU referendum has prompted uncertainty over the UK economy’s future, the situation outside London has improved significantly in recent years. Wages in the regions grew by 2.2% during the past 12 months, and unemployment is down to 5.1%.
“We have seen the domestic economy growing steadily, employment high and wages rising, and that is what drives markets outside London,” says Johnny Morris, research director at Countrywide.
Affordability
Affordability also pays a key part. Influxes of international capital and safe-haven sales have boosted London residential prices above those in the regions.
According to the Land Registry, prices in greater London have risen by 50% since their peak in 2007; the average price for a house in the capital is now more than £530,000. In the North West, prices are still 14% down on that period and the average is £117,000.
According to Lucian Cook, director of residential research at Savills, the potential for growth comes down to affordability.
“There is more capacity for house price growth elsewhere in the UK, with the greatest in the northern regional cities,” he says. “However, the key questions are, do you have the economic impetus for that growth to occur, and will the northern powerhouse generate higher economic performance in those areas?”
Policy and Help to Buy
Although more regulation, such as the mortgage market review, is curtailing people’s spending power, government policy continues to favour house buyers outside London, with Help to Buy now set to continue to at least 2020.
But according to Layton, “the problem outside London is that quite a few markets are propped up by Help to Buy. In the more affordable markets, without Help to Buy you would not have a new homes market.”
The new homes market is considered to be a separate arena. The outlook for housebuilders, despite generally positive sentiment about regional growth, has become more cautious.
“Most of them, even those not London focused, have invested in London and central London, and most of them see the EU referendum as a risk, for instance in terms of labour availability,” says Morris.
“For the big housebuilders, worries about the bigger economic environment affect them much more than a homeowner in Peterborough.”
So what is the outlook? Risks based on the wider economy are more easily read, says Layton, who adds that slower but more sustainable growth is no bad thing.
“The regions are based on disposable income and lending criteria,” he says. “Yes, lending costs will go up in the medium term, but as long as there is no massive increase, which I cannot see, moderate growth will continue.”
Provided the UK economy continues to grow, so too will house prices.
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