Parting of the ways

At this point in the cycle, we would expect to see house price inflation in London underperforming the UK average, as growth ripples away to the Midlands and North.

Historically, when this happens, London prices keep on growing, albeit at a slower pace. Over the next five years we expect growth in London to be much lower than at equivalent points in previous cycles as interest rates rise and the market rebalances.

Just as importantly, the experience of the past year tells us that those markets that traditionally perform best in the second half of a housing cycle can continue to grow, even if the London market is muted.

London

In the short term, London’s global city status leaves it more exposed to Brexit uncertainty, holding back confidence in the market. On top of that, house price-to-income ratios in London’s mainstream housing market are stretched to such an extent that even the small rises in interest rates we expect by 2021 will have a constraining impact on prospective buyers’ budgets.

Increasingly, price growth in the capital will be dependent on an area unlocking its latent potential, either through regeneration or infrastructure improvements.

The South

Though markets across the rest of the South of England remain less constrained by affordability than in the capital, they are likely to be held back by less housing wealth flowing into the commuter zone, and mortgage constraints in higher-value areas.

Price growth across much of the South is therefore likely to be dependent on earnings growth in the face of increasing interest rates. Lower-value markets may benefit from demand from budget-conscious buyers looking to stretch their buying power further.

The Midlands

In 2018, the Midlands has been the UK’s strongest-performing housing region. With fewer constraints on mortgage affordability than in areas further south, these markets have been able to better weather Brexit uncertainty. Sitting beyond the commuter zone, they have also been less exposed to the slowdown in London.

Despite the prospect of higher interest rates, there is capacity for growth in the loan-to-income ratios offered to mortgaged buyers in the Midlands. Together with earnings growth, this has the potential to drive further house-price growth over the next five years.

The North

With house prices in the North only recently returning to pre-credit crunch levels, there is more capacity for both household finances and mortgage lenders to support more growth over the next five years than in other regions across the UK.

This would fit the pattern of previous cycles. Smaller deposits for first-time buyers and lower home-mover loan-to-income ratios compared with most of the rest of the UK are expected to underpin demand in the owner-occupier market. Meanwhile, we expect the ability to achieve higher income yields in the northern cities to underpin investment demand from both institutional and private investors.

Scotland

We expect Scotland to perform ahead of the UK average, growing 18.2% over the next five years.

Much like the rest of the UK, growth will be tempered by political uncertainty with Brexit negotiations in 2019, a UK general election in 2022, and the additional factor of Scottish elections in 2021. Yet, Scotland still has room for growth, particularly in popular, well-connected neighbourhoods. In many of these markets, supply falls well short of demand, so competition will drive up values.

Wales

Wales is a hugely diverse housing market, ranging from the higher-value urban markets around Cardiff and Swansea to rural and coastal communities across Pembrokeshire and Gwynedd.

Historically, house price growth in Wales has been stronger at this point in the cycle, so we expect it to perform in line with the Midlands. However, there may be room for some local markets to perform better. Most notably, there may be increased housing demand from Bristol spilling over the Severn, once the bridge tolls are removed.