House prices will fall 5% in 2012

The UK has struggled to emerge from recession and there are fears that the economy may start to shrink once more. This ongoing economic weakness, lacklustre earning growth and public spending cuts will take a toll on the housing market over the next 12 months.

The 5% drop in prices will leave property values nearly 15% below their 2007 peak. In fact, even with the modest gains seen in later years, the agents forecast that average house prices will not hit 2007 levels again until 2018.

Grainne Gilmore, head of UK residential research at Knight Frank, said: “After falling by 15% in 2008, it was widely forecast that the market would dip again the following year, but this failed to happen - largely because of the drop in interest rates. We believe that this correction is still to come, but that it has been pushed further and further out because of low base rates. But next year, amid a “perfect storm” of a struggling economy, public sector cuts and rising unemployment, prices will fall. As interest rates start to rise, prices will struggle to maintain any notable growth until 2015.”

Despite the forecast showing UK residential property prices set for a slow correction, prime central London prices will continue to climb. Since March 2009, prices in the capital have grown by 37%. With prices now at an all-time high, many observers are questioning their stability. However, Knight Frank are predicting the geo-political issues will continue to push overseas buyers into London, especially at the top end of the market, as the capital is seen as a safe haven and buyers in central London purchase property for a long-term investment.

With this in mind, Knight Frank are predicting prime central London prices to climb 5% next year, before pausing in 2013 and rising by a further 4% in 2014. Cumulatively, prices will rise 24% by the end of 2016.

Liam Bailey, head of research at Knight Frank, said: ”Prices in prime central London are currently at an all time high, despite which we believe there is scope for further price gains over the next 12 months, averaging 5% across 2012. The reasons which have underpinned recent growth, a weak pound, renewed wealth creation in emerging markets, the search for safe-haven assets and flight capital – all seem set to continue at least in the short term reinforcing our positive view for next year.”

On a regional level, the North and South will continue to diverge. The large falls which have already occurred in the north of England, show that affordability levels are lower than in the south of the country. However, bigger price falls are still expected in the northern regions as these are more heavilgy dependent on the public sector. As public sector cuts start to bite, the forecast is for a localise rise in repossessions, placing further downward pressure on prices in these areas.

Have your say

You must sign in to make a comment