Mar 13, 2011

Not much hope of recovery in the bottom sector of UK property market

The history of the UK property market is repeating itself as the traditional market leaders once again outpace the historic laggers, both in terms of house price growth and transactions, new analysis from Savills reveals.
Lucian Cook, director of research at the property adviser, has analysed fifteen years of Land Registry data and identified the locations which lead and those which lag over the course of a cycle of price growth, including the period when they emerge from a downturn, to see if history can tell us what to expect next in this recovery phase.
‘There is now a certain inevitability built into the market. The schism between the best and the rest is expected to continue to grow as the recovery progresses.  Ironically, it is the least affordable but most affluent areas that are leading, and will continue to lead the market both in terms of price growth and activity levels,’ said Cook.
‘For a long time we have known that certain areas of the country, typically located in London and the South East, lead the recovery before the laggers, often the northern metropolitan areas, catch up. Our analysis shows us that the recovery ripple usually takes between five and ten years to spread across the country as a whole,’ he added.
Values in the leading 10% of the country grew by 7.5% over the past year and are now just a fraction off peak levels, while the bottom 10% of areas saw prices fall by 3% and are almost 20% off peak.
This pattern is expected to translate into a significant outperformance by the top tiers in the short to mid term.  The Savills forecasts anticipate that the top areas will see prices rise by a third over the next five years, while the bottom end of the market will struggle to see any price growth.
During the period from 2000 to 2005 the bottom tiers of the market rebounded strongly and outperformed the traditional market leaders, with 123 per cent price growth compared to just 43 per cent for the top slice of the market. ‘However, they started from a low base and factors such as low levels of equity, mortgage scarcity and poor economic indicators mean that growth ultimately proved unsustainable,’ said Cook.
‘There is a real question mark over whether the bottom end of the market has the capacity to outperform in the second part of this cycle, particularly if we have an ongoing mortgage constrained environment with greater regulation and different lending criteria applying to equity rich and equity poor borrowers,’ he explained.
Average prices in the top 10% exceed £410,000, more than eleven times the average household income, while average prices in the bottom 10% have slumped below the £100,000 mark, under five times the average household income.
Even at this apparently affordable level the bottom tiers of market do not have the potential to bounce in line with the top end. Its recovery may only be possible if and when mortgage lending frees up, or as investors start to see potential in the local private rental sector,’ he added.
The list of top performers from 1995 to 2010 is totally dominated by London boroughs, while the laggers tend to be northern locations with low levels of affluence and a traditional industrial heritage.
Yet there are distinct variations within regions. For example, Windsor and Maidenhead leads the market much in the same way as a prime area of London, whilst Brighton acts like a London borough. Through the South East, the ripple effect flows quickly into Surrey and Berkshire but with less speed into East Kent or Essex.
The study also highlights areas of the country which perform more like the capital and its commuter hinterland than their own region. Locations like Bath and North East Somerset and Cambridgeshire and the Cheshire belt from Altrincham to Alderley Edge are clear leaders as if they were located in the South East.
It is also clear that there are regional market leaders such as Solihull in the Midlands, York in the North and the Cotswolds and City of Bristol in the South West.

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