Inflation is expected to drastically erode UK house prices over the next five years, leading to a 3 per cent drop in real price growth, according to Savills World Research.
Savills forecasts an 11.5 per cent rise in property prices in the five years ending 2017. Once measured in real terms however, homeowners are predicted to find themselves in a worse position.
House prices are currently 11 per cent below 2007 levels but, adjusting for inflation, they are 24 per cent lower.
Savills associated director of residential research Neal Hudson says a subdued economy will continue to offer little in the way of drivers for either price falls or growth, but inflationary pressures will persevere.
He says: “In the short term, we expect inflation and not headline house price falls to strip out value as the market goes through a slow and gradual adjustment.
“Though there is significant variation across the capital, average prices in London are now above their previous peak according to Land Registry figures. But even in London, average mainstream values are effectively 9 per cent below 2007 levels after adjustment for inflation. By contrast, in the North East of England nominal prices are 21 per cent below their level five years ago, equivalent to a 32 per cent discount in real terms.”
The strong fundamentals underlying the London market means that Savills is predicting a 24 per cent rise in house prices over the next five years. This is expected to generate a ripple effect which feeds into the “South East uber-towns” such as Sevenoaks and Guildford, before filtering through to the areas popular with second-home owners such as the Midlands.
Hudson says: “Our house price forecasts are set against the backdrop of a low transaction market. This means that house price indices are being calculated by reference only to the part of the market that is trading, the relatively more affluent, equity-rich owner-occupier markets that now dominate activity.”
The volume of transactions is forecast to grow 28 per cent over the next five years, starting with 911 transactions in 2013 and growing to 1,169 in 2017.