The 2011 housing market outlook

Residential property prices are expected to remain at around their current levels in 2011, as the post-crisis bounce-back ebbs away, but whatever the movements of the average house price, homeowners can expect a wide disparity between price movements in different areas of the country.

The average price fell by 1.3% in the 12 months to November 2010, according to recent figures from Halifax, the largest mortgage lender, and now stands at £162,435. Although prices were buoyant in the first half of 2010, they slowed in the fourth quarter, dropping by 1.2% in October and 0.1% in November.

This weakness is a result of an increase in the number of homes for sale coupled with a fall in demand as buyers hesitate to trade up. Lack of mortgage finance also played a part.

Little movement

Despite the recent downward trend in the price of the average house, Halifax expects it to stay at or around its current level in 2011. But it says homes in the north are more exposed to falls than those in the south. Nationwide thinks prices will dip "modestly" throughout the year as the supply of properties for sale outstrips the number of buyers in the market.

Research from the Centre of Economic and Business Research (CEBR), an economic consultancy, predicts that prices will go up by an average of 2.2% in 2011. That's despite the dampening effects of a squeeze on disposable income – with VAT increases and rising prices – and higher unemployment as public sector cuts take effect.

Owen James, an economist at CEBR, says: "We see a tough outlook for disposable incomes over the next three years, and especially in 2011, with the VAT rise and the hangover effect of commodity price rises." But he says there should be better news further ahead, and he predicts an average price rise of 16% by 2014 as mortgage demand increases.

Opinion divided

However, economic consultancy Capital Economics has a very different take. It forecasts a 10% fall over the course of 2011, with London being the hardest hit. Paul Diggle, property economist at Capital, expects London prices to fall by 13% on average, while Scotland and Northern Ireland will be the most cushioned from falls and will see an 8% drop.

"Property price falls have been worse in the north, exacerbating the problem of overvaluation in the south," says Diggle. "While prices in London will prove relatively resilient in the short term, we expect the capital to see some of the largest house price falls in 2011 and 2012."

We have seen huge regional differences in house price movements over the past year. Halifax figures show that prices surged by 10.6% in the South West and by 8.9% in the East Midlands, while Northern Ireland was the hardest hit as prices plunged by 13.1%. In the North West they fell by 5%.

The North East, Scotland, Wales and Northern Ireland are heavily reliant on the public sector, and their economies will be harder hit by proposed government job cuts than London and the South East, eroding house prices there.

Martin Lewis, housing economist at Halifax, says: "We are not expecting much change in prices over the next 12 months, but the north/south split will continue, reflecting the strength of regional economies. Prices are more likely to fall in these regions, but any movement will be modest."

At the Royal Institute of Chartered Surveyors, chief economist Simon Rubinsohn says: "The likelihood is that the divergence in pricing between different parts of the country will become more marked over the coming year as public spending cuts bite."

This general picture does not take into account the type of property you have or its exact location, which can make a huge difference to the resilience of house prices when prices fall. For example, research from Halifax shows that prices in more than two-thirds of market towns are on average 14% higher than the county average.

Beaconsfield in Buckinghamshire has the largest premium, with houses trading at 145% above the average house price in the county. Wetherby has the next highest premium, with prices 99% above the West Yorkshire average.

If demand stays strong and supply is short, house prices in such areas could be cushioned from regional falls.