House prices: The east-west divide

Across Britain, some regions are in meltdown while others are still on the up. Phil Thornton sees a pattern emerge

Forget the North-South divide. The line that separates the winners from the losers in Britain's turbulent housing market splits the country neatly between east and west.

Last month's 2.5 per cent fall in house prices grabbed headlines and sent homeowners from the Scilly Isles to the Isle of Skye rushing to their calculators to work out how much they had lost during March alone.

But for half of them, it was unnecessary. The headline fall was the worst in 16 years, but it is, after all, simply an average for the whole of the UK. Dig into the figures, which came from the Halifax bank, and it turns out that as many regions enjoyed a rise as suffered a fall.

In the West Midlands, prices are down 5 per cent in the past quarter, yet the East Midlands is showing a rise of 2.2 per cent for the same period. The South-east is up, but the South-west is down. The North is up, but the North-west is down. The east of England is up, but Wales is down.

The emergence of this east-west divide has left experts scratching their heads. The Halifax admits that it is hard to see why the East Midlands and the West Midlands should have diverged so sharply, and has embarked on research to get to the bottom of the issue. "There are some marked regional differences," said Martin Ellis, the bank's chief economist.

There are a number of factors that may explain why different parts of the UK are rising and falling. The first is that while Britain is a small island, it is made up of highly divergent economies. For example, factors that drive house prices in London – City bonuses, high employment, immigration – are absent from the West Country, where quality of life and the natural beauty of the area are more important.

According to the Office for National Statistics, the areas of the country that have the lowest GVA (gross value added) – the economic activity per person, a measure of how much wealth each individual produces – are Cornwall, west Wales, the Welsh Valleys and Merseyside. The engines of growth are in inner London, the Thames Valley and the North-east. Inner London has the highest GVA per head of population at £44,982 compared with just £11,510 in Cornwall and the Isles of Scilly. In other words, steep house prices in the far South-west are unlikely to be based on economic growth alone.

Property markets in Wales and the South-west have benefited from an influx of outsiders seeking holiday homes or pension nest eggs. As a result, when these regions see sharp rises in prices, it is often driven more by speculative activity than by employment growth, in turn making them more vulnerable to a sudden change in sentiment.

Other parts of the country have been affected by a big surge in homebuilding, particularly of new blocks of flats aimed at the young-urban and student markets. The past decade saw a wave of city-centre apartment developments in a number of Northern cities, with Manchester, Liverpool and Leeds the most prominent. Many of these flats were bought off-plan by buy-to-let investors who planned to rent them out. But as mortgage rates have risen in the wake of the financial crisis, some are finding that the sums no longer add up.

Even the regional picture does not tell the whole story. It is increasingly clear that homebuyers have learnt to discriminate between tiny parts of the country. The boom that ran from 1997 to 2007 forced buyers to look further afield for bargains, pushing up prices in all regions in an indiscriminate fashion. Prices in the North rose 187 per cent over that 10-year period and 171 per cent in the West Midlands.

Figures from Nationwide Building Society show wild variations across sub-regions. Leeds saw prices drop 2 per cent in the year to March, while north Lincolnshire surged 10 per cent. Within the West Midlands, prices in Birmingham dropped 3 per cent, while neighbouring Worcestershire soared by 7 per cent. The "hottest" English cities are currently London and Cambridge, posting annual growth of 11 per cent and 10 per cent respectively, while one of the coolest is Bath, the annual growth of which has fallen by 4 per cent.

Within London, the outer suburban boroughs held up well compared with inner boroughs. Camden, one of the fastest risers during the boom, posted a modest 4 per cent rise, while Newham in the East End recorded a 19 per cent rise. "The most likely explanation for significantly lower house price growth in the inner London boroughs is the change in sentiment associated with the financial-market events since last August," says Fionnuala Earley, Nationwide's chief economist.

But before homeowners rush to sell their house in Cornwall and try to snap up one in London or the Norfolk Broads, they should bear in mind some caveats. The housing market may have reached a turning point after a decade of almost uninterrupted price rises and that uncertainty fuels volatility.

Martin Ellis says that while the East Midlands posted a 2.2 per cent rise in the three months to March, and the West Midlands saw a fall of 5 per cent, the position was a direct reversal of the previous quarter's figures. In the three months to December, the East Midlands suffered a 2.3 per cent fall, while the West Midlands rose by 2.1 per cent.

Peering into the future is even harder. House prices tend to depend on fundamentals such as population growth, rises in income and the volume of new housebuilding. In the long term, the majority of economists believe that the UK's growing population and sluggish planning system should support prices.

Meanwhile, specific regions face different threats. London is likely to suffer from a forecast 19,000 jobs being cut in the City, and Manchester and Leeds must work through an oversupply of flats. More remote regions that benefited from speculation – such as Wales, where prices have risen 188 per cent over the past decade – may return to earth with a bump. Tomorrow's homebuyers must relearn that old mantra: location, location, location.

West Midlands
Annual change: down 3.7%
Quarterly change: down 5%

North-west
Annual change: 1.3%
Quarterly change: down 0.5%

Wales
Annual change: down 5.3%
Quarterly change: down 4.7%

South-west
Annual change: down 3.3%
Quarterly change: down 2.6%

The North
Annual change: up 3.1%
Quarterly change: up 1.2%

East Anglia
Annual change: up 3.4%
Quarterly change: up 1.4%

East Midlands
Annual change: up 2.9%
Quarterly change: up 2.2%

South-east
Annual change: up 3.3%
Quarterly change: no move

Greater London
Annual change: up 2%
Quarterly change: up 1.6%

Source: www.moneysupermarket.com

How to survive the market troubles

*Do remember that this is a confused market. Some homes (especially in wealthier areas of southern England and parts of the North-west) have been on sale for months, with sellers and agents refusing to cut prices; houses that have arrived more recently to the market tend to have more realistic price tags.

*Do judge value for money by calculating the "pounds per square foot" of properties you like. Two houses in the same area may each have three bedrooms, but one is likely to have more space than the other.

*Do check prices thoroughly. Mouseprice.com will tell you the final sale prices of properties near a given postcode over the past few years, while Propertysnake.co.uk lists price cuts on homes that have been on sale for a while.

*Do go in for the kill on a new home. Any developer's deal (be it part-exchange, free stamp duty or free furniture) will be loaded on to the asking price anyway. In this market, always offer at least 10 per cent below the asking price as well as taking the advertised incentives. Developers will be keenest to sell where they have the most stock, so the best deals are in big cities. Remember that even in strong markets, new homes carry a premium, and thus do not appreciate in the first two years of ownership.

*Do consider extending your home instead of moving. Research shows that average legal and moving costs associated with a new home purchase run to £4,666, plus £9,750 for stamp duty. Those costs used to be covered when homes went up in price. Not any more.

*Do buy at auction. The tragedy of increased repossessions means that decent homes are often auctioned at cut price..

*Do sell your house if it's worth £1m or more – this part of the market continues to do well generally, especially in the South-east. Over 70 per cent of these purchasers do not need a mortgage, so they are unaffected by interest rates or lenders' problems.

*Don't make an offer at anything like the asking price for a home in the mainstream market, especially in western England. The Hometrack consultancy says that a typical sale price is only 92 per cent of asking price – so many buyers begin with an offer as low as 85 per cent or less.

*Don't expect to find four- or five-bedroom family houses going cheap; these properties are in the greatest demand. Most people now buying or selling them are doing so because they have to – for new jobs, or to get to the right location for kids' schools, or to have space for an elderly relative.

*Don't be fooled by a new estate agency ploy, the "open house". In markets with falling prices – particularly the West Midlands and the South-west – agents often set a one- or two-hour viewing period for a house to create an artificial buzz. Potential buyers are packed in and lured into making unjustifiably high offers to avoid the property being snapped up by a rival.

*Don't pay full estate-agency fees. In a strong market, average agency commission is 2.5 per cent of the sale price plus VAT. Transactions are 17 per cent down across the UK, and as much as 40 per cent down in some areas. Estate agents are desperate for work, so 1 per cent commission is a good target if you have the balls to bargain. Complement a traditional estate agent by advertising your home online at Halfapercent.com or Houseladder.co.uk.

*Don't look for a buy-to-let flat in any big regenerated city centre. Liverpool, Birmingham, Sheffield, Bristol, Manchester and especially Leeds are heavily oversupplied with new apartments. There simply aren't enough tenants to rent them, so some landlords have sold at big losses.

*Don't rule out buy-to-let completely, though. Long-term demographics show that two niche markets are growing: students in major cities (so buy cheaper old houses in the suburbs and convert them into rooms) and retirees (so buy smaller, easier-to-maintain homes in coastal communities).

So what kinds of homes should you buy?
By Toby Green

Norwich Road, Ipswich
Price: £279,950
Agent: Fenn Wright (01473 232 700)

Striking Georgian townhouse, a short walk from Ipswich's town centre. With four bedrooms, off-road parking and sash windows, it's a stunning example of the architectural style. Ipswich and the east of England never really experienced the heights that other parts of the country reached. Now, the area is reaping the benefits as prices remain stable.

Warneford Road, Oxford
Price: £525,000
Agent: Breckon & Breckon (01865 244 735)

Large five-bedroom, Edwardian family home spread over three floors. The house needs some updating, but it has a fair-sized garden and is in a popular area of Oxford. Families homes are still in demand. Oxford is good for both employment prospects and education, and is just over an hour away from London, so it's always going to be popular.

Raby's Heath House, Bletchingley, Surrey
Price: £1.5m
Agent: Ibbett Mosely (01883 712 241)

Luxury Grade II-listed four-bedroom home with 23 acres of land included. Because many of their owners are so rich they don't need a mortgage, the price of luxury homes has not taken much of a hit. It is also worth remembering that there is a scarcity of homes such as this on the market.