What next for house prices? House prices rise across the UK but the London market has caught a chill

By Simon Lambert Updated: 06:58 EST, 6 August 2015

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House prices are both a British national obsession and a key driver of the UK's consumer economy. So what will happen next in the property market? The latest house price news, predictions and market reports are analysed by This is Money's property expert Simon Lambert.

House prices are rising across the UK but London has caught a chill - property in the capital remains expensive but prices are slipping back from their peaks.

London was the only region to not record a rise in house prices last month, with prices falling for the sixth month in a row. But the Royal Institution of Chartered Surveyors said that despite recent falls, there were signs that the trend was starting to turn around as the pace of decline eased.

Simon Rubinsohn, chief economist at Rics, said that there was a strong view that the price of property in London will become even 'more unaffordable' over the medium term. London house prices could rise by 30 per cent over the next five years, surveyors claimed

House prices:The Land Registry monthly figures show house price rises almost across the board annually

Rising wages, increasing spending power and a stamp duty tax cut are boosting demand from homebuyers, Halifax claimed, as it reported house prices fell slightly in February.

The mortgage lending giant said prices dipped 0.3 per cent last month - the first monthly fall since October - with the average house now standing at £192,372 - almost £12,000 more expensive than a year ago.

Home values in England

England house prices

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Annual property inflation also continued to slow, from 8.5 per cent in January to 8.3 per cent in February - considerably below July’s 10.2 per cent recent peak.

But Halifax said its quarterly figures showed house prices picking up - and these are judged to be a better measure than volatile monthly figures.

House prices in the three months to February were 2.6 per cent higher than in the three months to December, Halifax said.

It suggested this was down to recent increases in people's real earnings and spending power as well as continued lower mortgage rates and stamp duty changes which came into effect last December.

Prices were.7 per cent higher in February than they were a year ago, taking the average price to £187,964, the figures from Nationwide Building Society showed.

But on a month-by-month basis, prices were actually 0.1 per cent lower, after a 0.3 per cent rise in January.

The market overall remained subdued, with just a small increase in mortgage approvals and home ownership falling to levels not seen for 30 years.

Starting to sink? When compared on a month-by-month basis prices are actually falling, Nationwide found

Subdued: While house prices are still rising, the rate of growth continues to soften, Nationwide reported

After rising almost continuously over the course of the twentieth century, the rate of homeownership in England has been declining steadily now since 2003.

House prices were up 1.3 per cent in January with the average property now worth £179,492 in England and Wales, the latest Land Registry figures show.

CAN YOU TRUST LAND REGISTRY FIGURES?

The Land Registry monthly report excludes a sizeable chunk of the property market. New build home sales are not included and neither are properties that have previously been in long-term ownership.

Due to its repeat sales formula, the Land Registry monthly index does not include any property that has not sold at least twice since 1995.

The annual rise was 6.7 per cent, a figure that has gradually fallen from the peak of 8.2 per cent reached in August 2014, which at the time was the strongest yearly growth since before the financial crisis.

However, the monthly rise wasn't driven by the capital which was one of three regions to experience value falls.

Prices in the capital fell 0.2 per cent, with a similar blip recorded in the North East and a larger drop of 1.5 per cent seen in Yorkshire and Humber.

The region which saw the biggest boost was the North West, with prices rising 2.6 per cent in the month. Prices in the South West were up 1.5 per cent and in the East 1.4 per cent during January.

In terms of annual growth, London is the region that still the leads the way with 12 per cent added value in the last 12 months.

Struggle: The average house price to earnings ratio is way above the long-run average, said Nationwide

Stamp duty change should help buyers

The biggest change for homebuyers in recent months has been the shift in the stamp duty regime

Until the Autumn Statement changes on 3 December 2014, stamp duty was charged slab-style and percentages above thresholds were imposed on the full purchase price.

Now it is now levied progressively, like income tax, with percentages stepping up above thresholds. The biggest savings come for those buying homes for up to £100,000 more than the £250,000 and £500,000 thresholds. Previously, they got hit with a big jump in tax.

Someone buying a £275,000 home will save £4,500 compared to their old tax bill, while someone paying £510,000 will save £4,900.

The new thresholds are:

0 per cent up to £125,000

2 per cent to £250,000

5 per cent to £925,000

10 per cent to £1.5million

12 per cent above £1.5million

Previously they stood at 1 per cent above £125,000; 3 per cent above £250,000, 4 per cent above £500,000; 5 per cent above £1million and 7 per cent above £2million.

> Stamp duty calculator: Compare new and old system bills

The house price forecast: What Savills sees happening in the property market

London property catches a chill, but the rest of the UK could perk up

In autumn 2014, we noted here that the overheated London property market had caught a definite chill, while the rest of the UK was perking up.

The latest house price outlook from estate agent Savills suggested this would continue, with London tipped to see no property inflation next year while homes elsewhere rise.

It then tipped London to post the lowest regional house price growth over the next five years, at 10.2 per cent, compared to a 19.3 per cent UK average forecast. That overall forecast is a cut from earlier this year, however, when Savills said house prices would rise 25 per cent by 2018.

The property market pace in the super-rich playground of Central London slowed some time ago, but for much of the past two years many of the more ordinary parts of London – the bit outside the Circle Line - were gripped by a boom.

Double digit property inflation, above asking price offers, queues to view, and dastardly selling deeds were the order of the day. A situation almost unrecognisable to those living in many other British locations.

Now the first signs of a slowdown are starting to emerge in the slew of property market surveys we get each month. Nationwide, Halifax and the Royal Institution of Chartered Surveyors have all recently flagged a loss of momentum in the capital, but things picking up outside it.

Lucian Cook, of Savills, said: ‘On affordability grounds alone there is limited capacity for house price growth in the mortgaged part of the London market over the next five years. A period of sustained low price growth is needed to rebalance the market.

‘At the other end of the scale, there is more capacity for price growth in the North East, though the economic drivers for it to be realised are weak.

‘Against this context, we expect the South East to see the highest levels of house price growth over the next five years and London the lowest, with buyers priced out of one moving to the other.’

Apply the brakes: What could hold the property market back over the next five years

Savills’ sentiment chimes with that of research that claims UK house prices are at the same level as a decade ago once London homes are stripped out.

Property investment specialist London Central Portfolio says that the average property value recorded by monthly Land Registry figures stood at £177,299, but with Greater London removed the figure across England and Wales was just £133,538.

This is in line with the £133,126 level seen in July 2004, which LCP thinks should dispel fears of a new national house price bubble.

But ONS figures also show wages adjusted for inflation back to 2004 levels too, with workers suffering their own lost decade.

Moreover, house prices compared to wages on a national level also remain exceptionally high. Nationwide’s measure of this shows homes have only been more expensive compared to earnings at the peak of the 2000s boom.

Lost decade: Once London is removed house prices are stuck at 2004 levels, says LCP

In the doldrums: Wages adjusted for inflation are also at 2004 levels, the ONS reports

Generation game: Substantial house price inflation from 1997 to 2007 has created a divide

House price history - what you need to know

[The content below was written as the property market slumped in 2009, it has been kept as a matter of record]

Anatomy of a house price slump: how it happened

The party finally came to a sticky end for UK property prices in 2008. After a decade long boom, the market peaked in late summer / autumn 2007, and then prices tumbled as banks beat a hasty retreat from easy lending.

House price falls accelerated through 2008 and property market activity hit record lows in late 2008 and early 2009.

The property market's performance in 2008 was worse than almost all of the gloomiest predictions made for the year.

Of the major reports, the gloomiest picture was painted by the Halifax. Its index showed the average property losing a greater percentage of its value in just 12 months than during the whole peak to trough period of the 1990s crash.

In December 2007, the Halifax index said the average home was worth £197,074, a year later this had fallen to £159,896 ' a drop of 18.9 per cent. At the peak before the 1990s crash, Halifax's figures show the average home was worth £70,247, in May 1989. Six years later, property prices bottomed out, in July 1995, at £60,965. This was a peak to trough loss of 13.2 per cent, although it was much larger in real terms.

The Land Registry's report showed property prices falling by 13.5 per cent over the year, with the average home in England and Wales worth £158,946 ' a similar value to October 2005. Even in the supposedly robust London market, the average home lost 12.9 per cent, or £45,585, to end 2008 worth £307,071 ' a similar value to November/December 2006.

How the property market was hammered?

While property price statistics for 2008 and early 2009 painted a fairly bleak picture, they did not fully reflect the devastation wreaked so rapidly.

In a little over a year, a booming property market became desolate, with the Royal Institution of Chartered Surveyors reporting its agents selling less than one property per week of the year.

A perfect storm hit the UK property market in 2008. With property prices having risen by 200% in the ten years to December 2007, according to the Land Registry, property was in a bubble.

Many economists had predicted that this bubble was ripe for bursting, but after showing signs of a slowdown in 2005, the market sped up again and the average price peaked between August 2007 (Halifax: £199,612) and January 2008 (Land Registry: £184,784).

The pin that burst the bubble was the credit crunch. The sub-prime crisis that had been brewing in the United States erupted in the summer of 2007, and as the year continued, the residential mortgage-backed securities market that had driven massive growth in credit for homeloans essentially ceased to exist.

These allowed lenders to sell packaged residential mortgages to a special purpose vehicle, which then issued debt to investors, lured by strong returns from a supposedly liquid and low risk investment.

According to the interim report by Sir James Crosby, commissioned by the Treasury, between 2000 and 2007, the total amount outstanding of UK residential mortgage backed securities and covered bonds rose from £13bn to £257bn. The report said that by 2006 mortgage-backed security funding accounted for two-thirds of new net mortgage lending in the UK.

In July 2007 this market came to an 'abrupt halt', according to Crosby. This brought about the collapse of Northern Rock in the UK, problems for banks such as Bradford & Bingley that had fuelled the buy-to-let boom and major issues for all mortgage players. In February 2008, Northern Rock was nationalised and American bank Bear Stearns, which had specialised in the fancy finance that fuelled the mortgage boom, collapsed. It was the final sign that the party was over.

Banks fearful of huge losses began to dramatically cut back on mortgage lending and a vicious circle began. The more banks cut back on lending and raised deposits, the fewer homebuyers could secure finance, the more property prices fell and banks became more fearful and cut back further on lending.

The mortgage crunch and property prices

Mortgages are the key to the property market. The vast majority of buyers cannot purchase a property without a homeloan and the price, availability and restrictions imposed on these have the biggest impact on their ability to buy a home.
The dramatic slump in property prices in 2008 and early 2009 came as lenders turned off the mortgage taps. Lenders suffered a lack of funding, with the mortgage backed securities market that accounted for two thirds of new lending suddenly seizing up. Meanwhile, banks were also hit by a crisis of confidence, as they looked over the Atlantic and saw the devastation wreaked in America heading for the UK.

Mortgage rates rose, deposits were hiked and reports abounded of lenders pulling mortgages at the eleventh hour. Mortgages for home purchases dived by 49 per cent in 2008, to just 516,000, according to the Council of Mortgage Lenders. This was the smallest number since 1974 and represented a third less than the 723,000 approved in 1991 ' the lowest level of the 1990s slump.

The Bank of England's monthly figures have also shown mortgage activity drying up. The number of mortgages for homebuyers hit a record low of 27,000 in November 2008.

In September 2007, just before the downward spiral began Bank of England figures showed mortgage approvals for homebuyers of 102,000 ' significant at that time as this was the lowest level for two years.

Nationwide house prices vs mortgage approvals graph

Inflation and paying off your home

One of the effects of the rapid inflation in property prices since the early 1980s is that it paid off a generation's mortgages.

Those who bought a home in the 1980s to early 1990s, and then held on through double-digit interest rates and the 1990s crash, have emerged with properties that have risen to be worth five to ten times their mortgage.

The average UK property cost £30,898 in 1983, according to Halifax, and £198,500 in September 2007 ' an increase of 542 per cent. Even allowing for the current slump that property was worth £160,327 in February 2009, an increase of 419%. For a similar effect to be delivered to a modern day homebuyer, the cost of the average property would need to stand at £832,097 in 2035.

In 1983 the average wage according to the Office of National Statistics was £7,700, today the most comparable measure stands at £24,900, an increase of 223 per cent. If both property and salary inflation are sustained at the same long-term rate, the average wage by 2031 will be £80,500 and the home will cost 10.3 times more.

This compares to the average home costing four times the average wage in 1983 and 8.5 times the average wage (£23,300) at the peak of the Halifax index in August 2007.

The big problem is that since 2000 wages have not risen anywhere near as fast as property prices or general prices in the economy, and since recession struck they have barely risen at all while inflation has returned with a vengeance.

The idea that inflation pays off individuals' debts really only helps people if their wages rise in line with prices - otherwise inflation is just making them poorer.