New predictions from leading economic forecaster Cebr – the Centre for Economics and Business Research – show that house prices are set to increase by more than previously expected in 2015. Cebr now expects the price of the average home in the UK to rise by 4.7% – up from its March forecast of 1.5% growth.

 

A chronic lack of properties being put up for sale has pushed up prices in recent months and is one of the reasons behind the upward revision to the forecast.

 

While the London housing market was a key driver of growth in 2014, this year we expect average prices in the capital to increase by just 3.7% – less than the rate of growth for the UK as a whole. Although the Conservative victory at the general election means that a mansion tax is now off the table, the prime end of the London market has been dragged down by last December’s stamp duty changes, which pushed up the cost of purchasing luxury property.

 

With housebuilding expected to continue falling short of that needed to keep pace with population growth, UK house prices are expected to rise further over the coming years. Cebr expects house prices inflation to stand at 3.4% in 2016 and 4.4% in 2017. Between 2015 and 2020, the average price of a home is expected to increase from £261,000 to £321,000 – a 23.1% change.

 

In addition to supply shortages, strengthening earnings growth and continued low interest rates are also expected to support property prices. Although the Bank of England is expected to hike interest rates from early next year, rates are expected to rise only very gradually, with the Bank Rate settling at a “new normal” of 2% – much lower than pre-crisis levels.

 

Nina Skero, Cebr Economist and main author of the report, said, “With the possibility of higher taxation on prime property and intervention in the rental market less likely, the Conservative Party’s victory in the general election will likely support stronger price growth in the second half of 2015. Prices will also see a boost from the lack of fresh properties coming on the market.

 

“In London, average house prices are being weighed down by the prime end of the market. A strong pound which makes London property less affordable for foreign buyers and December’s decision to increase stamp duty on properties valued above £1.1 million are both deterring some prospective buyers”.

 

Figure 1: Average UK house price – annual % change