Savills, which at the end of last week released a gloomy forecast predicting a 10 per cent price drop for average house prices last year, has given details of its regional analysis.

It says mainstream housing markets furthest from London, where mortgage affordability is least stretched, will be the strongest performers over the next five years. They will suffer slightly less short term downward pressure on prices and enjoy more capacity for price growth during the recovery.

“Historical trends suggest that, from a geographical perspective at least, we are just over halfway through the second half of a housing market cycle” says Frances McDonald, Savills research analyst.  

“And we expect cyclical factors, which are closely linked to affordability, to continue to take precedence over the regional distribution of economic growth over the next five years.

“However, regional price growth is expected to converge around the UK average at the end of our forecast period as the value gap shrinks, potentially putting London and the South East back in a position to deliver the strongest house price growth from 2027 onwards.”

The worst performing regions in the short run – just 2023 – will be the south east and the east of England, where prices are forecast to drop 11.0 per cent, and London which is set to suffer a 12.5 per cent price collapse.

“The housing market has remained remarkably strong through the first nine months of 2022, but demand dynamics changed over the autumn with the realisation that the Bank of England would need to go faster and further to tackle inflation” says Lucian Cook, Savills head of residential research.

“A new prime minister and fiscal policy U-turns appear to have reduced some of the pressure on interest rates, but affordability will still come under real pressure as the effect of higher interest rates feeds into buyers’ budgets. That, coupled with the significant cost of living pressures, means we expect to see prices fall by as much as 10 per cent next year during a period of much reduced housing market activity.

“There are several factors that will insulate the market from the risk of a bigger downturn as seen after the financial crisis.  Borrowers who haven’t locked into five-year fixed rates had their affordability heavily stress-tested until August this year.  This, combined with relatively modest unemployment expectations and signs that lenders are looking to work with existing borrowers to help them manage their household finances, should limit the amount of forced-sale stock hitting the market next year.

“And looking longer term, the Bank of England’s relaxation of mortgage regulation over the summer has substantially enhanced the prospect of a price recovery; but only as and when interest rates start to be reduced, once inflationary pressures in the wider economy ease.

“Meanwhile, rental value growth will continue to outpace earnings growth in the short-term because of the pronounced imbalance between supply and demand, which will come as positive news to landlords already facing higher borrowing costs, but will put increasing pressure on struggling tenants.”