Banks and estate agents forecast more growth in all parts of country after surprise gains in 2013
Almost £20,000 will be added to the average house price next year, according to the most optimistic forecasts. Photograph: Anthony Devlin/PA
UK house prices are set to rise by up to 8% in 2014, building on the surprise gains made in 2013, according to the most bullish forecasts by economists and property professionals.
A round-up of seven surveys by banks, surveyors and estate agents shows widespread forecasts of further growth, with gains in all parts of the country, not just London and the south-east. Government initiatives to boost mortgage lending have restored confidence to the property market and driven demand, and this is set to continue into next year despite the removal of some stimulus and changes in the regulation of the mortgage market which will mean tougher affordability tests on loans, the forecasts said.
The most optimistic forecasters are predicting an 8% rise in prices next year, which would add almost £20,000, or £1,600 a month, to the most recent Office for National Statistics average house price of £247,000. Those predicting growth at this level include the Royal Institution of Chartered Surveyors (Rics) and the UK's largest lender, Halifax.
Even the normally downbeat Capital Economics said it expected house prices to rise by 5% next year, and admitted that could be an underestimate. Matthew Pointon, a property economist at the firm, said: "If sellers do not return to the market during the key spring period, prices could rise more quickly."
An imbalance between supply and demand is behind Rics's expectation of 8% growth, and has been one of the key drivers of prices in 2013 as buyers' appetites grew at a faster rate than the number of homes available, according to estate agents and surveyors. It is also one of the key reasons why critics have condemned the second part of the government's Help to Buy scheme, which launched in October and offers lenders a taxpayer-backed guarantee on mortgages of up to 95%. While the mortgage guarantee scheme promotes lending, it does nothing to encourage building, and some estimates have suggested that the UK needs at least 100,000 extra homes a year to keep up with demand.
The further rollout of Help to Buy in early 2014, which will see major lenders such as Santander and Barclays offer 95% loans, is set to bring new borrowers into the market as it will open up more options for those with just 5% to put down as a deposit. That will come as changes are made to the government's Funding for Lending scheme (FLS), which has allowed banks and building societies to offer record-low mortgage rates in 2013. From January, lenders will no longer be able to use the scheme to fund household credit and will only be able to draw on it for business loans. However, although it has been a key factor in allowing consumers to access cheap mortgages, the withdrawal of FLS from residential lending is unlikely to have a big impact on the market, commentators said.
"Funding for Lending has done a lot of its job in reducing the overall cost of funding for everybody," said Fionnuala Earley, a former chief economist at Nationwide and now residential research director at the estate agents Hamptons International. Earley said its withdrawal was unlikely to lead to an increase in mortgage rates. "That and the improvements in the economy have boosted confidence and made lenders less risk averse."
Earley said the brakes on the housing market were likely to be from tougher affordability checks coming into force in the spring, following the mortgage market review by the City regulator, the Financial Conduct Authority. These will require banks and building societies to do new stress tests on borrowers to ensure they can still afford their loans if interest rates go up. The Council of Mortgage Lenders has also said it expects this to limit lending in the coming years.
Last week, its chief economist, Bob Pannell, said the rules would "hardwire in a more risk-averse lending environment for the future" and meant lending, which is set to hit £170bn in 2013, but reached £363bn in 2007, was unlikely to go "very far above £200bn a year".
However, Grainne Gilmore, head of UK residential research at the estate agents Knight Frank, which is predicting a 7% increase in UK prices in 2014, said banks and building societies were already being cautious with their lending criteria, "so the affordability checks are unlikely to have a significant impact".
The Bank of England will be carefully monitoring the housing market in 2014, and Howard Archer, chief UK economist at IHS, said it could act to slow the market – but that he was not sure a single intervention would work on its own. "A combination of actions may have some braking impact on the housing market – including at least a dilution of the Help to Buy scheme (such as lowering the ceiling for purchases under the scheme from £600,000 to £300,000) and very close monitoring of banks' underwriting standards on mortgages," he said. "There could also be a further tightening of underwriting standards. Banks could also be asked to increase capital requirements against mortgage lending."
Archer, who expects price inflation to hit 8% in 2014, added: "Of course, the Bank of England could also raise interest rates to rein in the housing market, but it is clearly reluctant to do this soon given the impact this would have on the economy."
Earley said she was happy to see the housing market come under close scrutiny, and that the Bank's new role in monitoring lending was a good thing for homebuyers. "This should lead to a much more sustainable market and that's more positive than a situation where people have a kneejerk 'I've got to buy now' attitude."
Closing the gap
The story of 2013 is a tale of two property markets: London and the rest of the UK. Headlines claiming "London house prices jump by £50,000 in a month" were only referring to a leap in asking prices and might have reflected sellers' optimism more than reality, but all of the major price indices showed the capital powering ahead.
The Land Registry's most recent data, which strips out the newbuild properties that attract a lot of foreign investment money, showed that in October prices across London were up by 8% year-on-year, while nine boroughs had seen double-digit growth. In Lambeth, prices were 13% higher than in October 2012, closely followed by 12% growth in Wandsworth and Hammersmith & Fulham.
Looking ahead, commentators are expecting London's growth to continue, but some are saying that the gap will fall. Martin Ellis from the Halifax said he expected fewer regional variations next year: "There are signs that the improvement is becoming more broadly based with much of the country now recording price rises. We expect the regional pattern to be more even in 2014, with all regions experiencing price gains." He added that the high ratio of prices to earnings in London would put constraints on rises there.
The Royal Institution of Chartered Surveyors is forecasting 11% increases in London, but said it expected the east of England and east Midlands to record rises of 10%. Knight Frank is forecasting a rise of 8.4% in London, and 7.6% in the wider south-east and in the south-west. Looking further forward, Savills has said it expects the wider south-east to outperform London over the next five years, with Bournemouth, Brighton and Windsor among the towns expected to see average prices soar by 32% while London records gains of 24.4%, just behind a national average of 25%.
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