Where science meets art

If I were to bet my life savings on the piece of Savills research that will get more reaction than any other, I would stake it on this – our annual Residential Property Forecasts.

To arrive at our final figures, we use large sets of data and economic modelling to unlock future trends. But this work involves a degree of conjecture, too.

Our short-term forecasts rely on us accurately predicting what will happen to sentiment. We have some lead indicators of supply and demand to help with this. But 2018 has not been a normal year, and these indicators are arguably more fickle than ever.

Extreme scenarios

Take, for example, the reporting of the Bank of England’s extreme, almost apocalyptic, scenario of 35% house price falls in the event of a hard Brexit and spiralling interest rates. We believe this is highly unlikely. A correction of this nature is without precedent and the economic conditions required are at the margin of a wide range of potential outcomes, as Mark Carney pointed out after the headline writers had made mischief.

That said, sentiment is exposed to how Brexit negotiations proceed and, specifically, the perception of what the outcome will mean for household finances.

While this all remains unclear, do not expect any great movement in house prices or market activity at a national level.

Our longer-term outlook for the housing market is more dependent on what will actually happen to household finances. Assumptions about earnings growth and interest rates are critical to this, especially in an age of mortgage regulation. Our assumption, which is aligned with the central scenario of the Bank of England, is that these will increase gradually to support total house price growth of 14.8% at a national level over the next five years. As we argue on unfamiliar territory, that would put a squeeze on the level of mortgage that borrowers are offered relative to their salary, as mandatory stress tests become more difficult to meet.

We expect this to act as a drag on house price growth, especially in London and the commuter belt where the growth in house prices from 2005 to 2016 has left less room for movement.

More than just house prices

However, this report is not just about house prices. It is also about trends in buyer types and where they are buying. We also examine housing delivery, and just how the government sets about fixing our ‘broken’ housing market – a key plank of domestic policy.

This report may not come with a cover-mounted comfort blanket of absolute certainty. And you will have your own views about our conclusions. But forecasting is as much of an art as it is a science – and looking into the future remains a vital part of what we do.

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