Savills remains bullish about the UK property market

Yolande Barnes Director Savills Research explains why she remains confident about the future performance of the UK property market.

Expectations are that there will be a 50 basis point rise from the current base rate level of 5.25% tomorrow, rather than the further 25 basis point rise that we allowed for in our forecasts at the end of last year. We have already warned that a prolonged spell with interest rates at or above 5.5% could put the brakes on growth rates in the UK housing market.

Our forecast for this year of 7% growth in mainstream UK markets allowed for a brief increase in base rates to 5.25%, and could probably withstand a brief period at 5.75%, but only providing consumer expectations were for an imminent reduction in the near-term. If interest rates do stay at 5.75% to year end, with no expectation of reductions, then we anticipate a slower market and lower house price growth during the remainder of the year.

Even a prolonged spell at 5.75% base rates wouldn’t lead us to predict falls in house prices. We believe that the role of equity in the market and the robustness of affordability are under-estimated by most housing market analysts. We continue to believe that house prices are less affected by interest rate rises than many presume. Our analysis of household finances and housing costs suggests that there is still a surplus in most UK households that will act as a cushion against house price falls.

The danger point comes if interest rates hit 6.5% and this cushion disappears. At this level of interest rates, mortgage repayments cost the average household so much that there is no surplus income left at all to pay for more than basics (food, clothing etc). Even at this point, it takes a while for house prices to fall. Most impecunious households will stay put, some will adjust their mortgage repayment terms and others will dig into savings and reserves.

The first casualty of this level of affordability squeeze is turnover. In the last property downturn, the household income surplus actually turned negative (ie households were in deficit after basic spending and housing costs) before house prices fell. It is at the point where interest rates exceed 6.5% for a prolonged spell that substantial house price falls appear inevitable.

Our expectation, in line with the money markets, is that the longer term average interest rate will be between four and five percent. If the markets are wrong, then we would anticipate a downward adjustment in the value of many asset classes, not just property, over the medium to long term. For the UK property market, in the absence of harsher economic conditions, this would probably take the form of a long period of no growth and low turnover rather than the spectacular falls predicted by some.