Affordability at a national level

Our forecasts allow for mortgage affordability to return to the 35-year average, having been below that level since 2008, with progressive interest rate rises only supporting modest levels of house price growth.

The ability to stretch affordability further will be limited by mortgage regulation, as the stress testing conducted by lenders limits the amount people can borrow; particularly in London and the more expensive markets of Southern England where loan to income multiples are higher than the UK average.

Regional re-balancing

Over the next five years we expect to see a continuation of the trends historically witnessed in the second half of a housing market cycle, where London and the South underperform markets in the Midlands and the North of England.

This half of the cycle appears to have begun in 2016, coinciding with the Brexit referendum, at a time when London hit up against the limits of what people could borrow relative to their income.

By contrast, there remains more capacity for growth in house price-to-income ratios in the areas that typically perform more strongly at this stage of the cycle, even as interest rates rise gradually.

Bringing London back into line

Current average incomes of first-time buyers, the amount they are borrowing relative to that income and, most strikingly, their deposit, illustrate how far London remains dislocated from the rest of the UK housing market and why it has been more exposed to a market slowdown (see graphics, below). Our forecasts allow the level of first-time buyer deposits to converge with the UK average over the next five years (chart below). The improvement in deposit affordability in London is likely to gradually widen the profile of first-time buyers and result in an increase in transaction levels in this group, though the barriers to home ownership in the capital will remain high.

_{Read the articles within Residential property forecasts below.}