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Stormy times ahead for housing market – Cluttons

The forecasts cover UK and Central London house prices and rents in Central London.

Other findings on UK residential sales reveal that:

* Within London there will, over the short term, be increasing focus on good quality properties in each postcode area.

* There may be a perfect storm ahead combining a lack of development finance and a planning vacuum, though this could provide opportunities for those with planning and finance in the right area.

Andrew Stanford, Head of Cluttons’ Residential consultancy division, said: "The balance of power in most locations in the mainstream UK housing market has moved back firmly into the hands of purchasers, placing downward pressure on prices.

"We expect this dynamic will be maintained over the next 12 to 18 months as austerity measures take hold. We forecast UK house prices at the end of 2010 to be up 2.6%, but this reflects strong growth in the first six months and further price declines in Q4.

"Continued diminutive quarterly falls in the first half of 2011 are expected, stabilising in the latter half of the year, delivering a small overall decline in prices of 0.1%.

"Looking further ahead we expect strength to return to the market with an increase of nearly 4% in 2012 and then 5% in 2013 and 2014 respectively, on the back of an improved economic environment and greater household confidence as the spending cuts work their way through the economy and the private sector takes some benefit." 

Regarding the London market, Stanford said: "Buyers are undoubtedly seeking the comfort of good quality, well located property in whichever postcode area they are looking.

"While such properties are recording strong interest and positive price growth, more secondary assets are failing to attract buyer attention and are driving headline price falls.

"Reflecting this, we forecast a Central London price growth of 2.5% in 2011, picking up to 6.6% in 2012. The pattern is similar in Greater London as a whole, although next year the pace of growth will be dented by household uncertainty, resulting in an increase in prices of 1.3%, rebounding to 7.6% in 2012.

"The disproportionate number of households dependent on the financial services sector, directly or indirectly, has to an extent driven demand in London over the last year. Current demand profile indicates that such buyers remain strong in the market, though this factor should not be overstated.

"Despite the economic slowdown, London will continue to benefit from its predominance of higher value business activity and its focus for international investment. As a result the capital will fare better than the UK as a whole, both economically and in terms of house price growth. On an annualised basis we expect UK residential values to rise by 3.3% per annum over the next five years, compared with 4.4% per annum in Central London."

Demand for London rentals will increase due to short term issues (job insecurity, worry about the market, and the availability and cost of finance), but also longer term as fewer can come up with down payments or access finance.

Commenting on London rentals, Stanford said: "Over the last quarter we have seen the strong pace of the Central London rental market maintained, with rents across the capital increasing by 4.3% during the third quarter, hence our forecast of an increase 13.3% in rents for 2010 is higher than we anticipated due to a positive supply and demand story.

"Notably, corporate letting activity has returned to the market after a difficult couple of years, with demand coming from multi-nationals, the business services sector and the banking sector.

"The cost of accessing home ownership in London is prohibitive for a large number of households. Over the last three years 80% of first-time buyers under 30 years of age received parental financial assistance.

"As we enter an era of reduced state benefits and pensions, the depletion of wealth from older generations will limit such assistance in the future. The persistence of mortgage lending constraints will therefore continue to expand the cohort of households to whom homeownership is not an option, and for whom renting will be viewed as a medium to long term necessity.

"Looking forward, we anticipate rental values will remain elevated as the challenges in the housing market maintain the demand for rented accommodation. We therefore forecast rents in the capital will slip back slightly and broadly keep pace with inflation, increasing by 3.1% in Central London in 2011 and 4.0% in 2012."

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