Greater London house price growth of 6.9% predicted in 2013

Key Points:

·      Prices to rise in PCL by 8.4% this year up from previous forecast of 5%

·      Return of bidding wars in some areas of London

·      Rental growth static at 3% in 2013

·      Prospect of rising base rates a concern

Greater London house prices are set to grow by 6.9% this year, annualised at a rate of 3.2% over the next five years as the Government’s Help-to-Buy scheme is extended to all homebuyers from next year bringing more financed buyers to the market without an equivalent increase stock, reports Cluttons in its Residential Property Forecasts – Q3 2013.

The consequence of this pace of uplift in house prices will push ownership in and around London out of reach of yet more households. Even in London where earnings tend to grow slightly ahead of the national average, it is unlikely that average earnings will keep pace with this rate of house price growth over the next two years as the economy struggles back to strength.

The position is more acute in prime Central London where Cluttons has revised its forecast of 5% house price growth to 8.4% this year with an annualised average of around 4% to the end of 2018. Credit ratings agency Fitch has also warned that Help to Buy could artificially push up house prices without increasing the number of homes built, which corroborates Cluttons' expectations of affordability re-emerging as the central issue for buyers given that mortgage lending has improved.

The upturn in prices has caused a return of bidding wars in the capital which has tempered the capacity of first time buyers to enter the market. Greater acceptance of buy to let mortgages for those wishing to rent and buy or rent further from London has further reduced the availability of stock traditionally available to first time buyers.

Sue Foxley, head of research at Cluttons said: “Improved consumer confidence, an easing in mortgage credit and the raft of government policy intervention measures to bolster new buyer demand will drive further capital growth and this has led us to revise our forecast to 8.4% price growth this year.

“The prospect of rising base rates over the medium term proffers a further concern with the ratio of residential values to gross earnings already over seven in London. With few signs of a dramatic increase in supply that would have the potential to change the balance of this equation, the rental market will inevitably move up the agenda for London’s households and policy makers.”

Cluttons also reports that rental demand in Central London remains strong but individual and corporate rental budgets are subdued which is translating into RPI, nil or slightly negative rental growth. Cluttons forecasts London rents to grow by 3% this year, with an annualised average of 4% per annum to the end of 2018 which is in line with long term average earnings growth for London.