Lucian Cook, Director of Residential Research at Savills, takes us through the changing landscape of residential real estate.
1. Five years on from the credit crunch, what does the residential real estate market look like?
The legacy of the credit crunch has been a weak economic recovery and constrained mortgage availability. As a result we have seen a partially functioning market since 2007, with housing transactions 45% lower than 5 years ago. There are, however, big differences across the market.
The average UK house price is 11% lower than 5 years ago in nominal terms (24% lower in real terms) but the market is very diverse. The North East has seen the biggest drop in house prices (over 20%) whilst London prices are on average above where they were pre-crunch.
2. What does the future hold? What will be the main trends in the next 5 years?
House prices are set to grow again in nominal terms, at an average of 11.5% in the five years to end of 2017. The extent of that growth will be limited by interest rate rises. These will contribute to the fact that in real terms prices are expected to decrease marginally by 3%, though we expect continued regional variation.
In addition, we expect the big differences in the amount of housing wealth controlled by different generations to continue to change the shape of the housing market.
Already the level of owner occupation amongst baby boomers and downsizers is 77% while that of first-time buyers, or "rentysomethings", is only 36%.
With long term constraints on the availability of mortgage debt, private renting amongst younger households is set to rise and rise. This expected growth means £200bn needs to be invested in the private rented sector. But only 25% of this funding is expected to come from "buy-to-let" mortgage finance, which means there are opportunities for funds and institutions, as well as property companies and private equity.
Those investors should be able to capitalise on rental growth which is expected to reach 18.2% in the 5 years to the end of 2017 at a UK level with growth in the Greater London area expected to be 26.4%.
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