North-south divide returns to haunt the British property market

Stiff competition among buyers has returned to bits of London, but properties are harder to shift in the North. Alessia Horwich and Julian Knight report

Trying to predict the property market is about as easy as picking next week's lottery numbers. House price indices of late have inched into positive territory, provoking some estate agents to breathe a sigh of relief. The Royal Institution of Chartered Surveyors said last week that house prices had just enjoyed their biggest rise since December 2006, about eight months before the onset of the credit crunch.

But get into the nitty gritty of the housing market and a patchier picture emerges. London is growing strongly, followed by the South and South-east, while the North-east and Midlands are still in the doldrums, not helped by above-average unemployment rates. Analysts are hailing the return of the north-south property divide of the 1990s, which had narrowed during the last boom.

In London, some estate agents and analysts say that prices have now returned to 2007 levels. The price recovery is being driven by several factors. "London is a sought-after city with only a limited number of residences in certain areas. So if you want the best you still have to pay for it," says Charlie Noel-Buxton, a partner at Cluttons estate agents. Sales are up in the capital thanks to an influx of foreign investors taking advantage of the weak pound, as well as British investors who previously would have played the stock market but are now looking for a less volatile proposition. With more buyers about and a shortage of properties, agents in the capital say the right ingredients are there for prices to rise. Even mortgage finance has been showing signs of easing of late, with many of the largest lenders willing to accept higher loan-to-value ratios than a few months ago.

"Kensington and Chelsea and Mayfair are like a parallel universe," says Michael O'Flynn, a director of online estate agency findaproperty.co.uk. "Agents are talking about gazumping and sealed bids so it's a very hot area with lots of pressure on prices."

In London, the South and the South-east, the middle range is also holding firm. These investors are usually older, cash rich and have good access to finance. They are looking for attractive investment prospects, both flats in town centres and larger houses in the suburbs. "What is selling well," says Mr Noel-Buxton, "is property that is well priced, accurately valued and generally a good floor, address or position."

But even within London, there are wide differences in market strength. Where the mid to top range is enjoying increased investment, price drops in cheaper areas with smaller and lower-value houses and flats show how the first-time buyer market is still struggling because of restricted finance.

The problem for optimists is that the good news might not last. The props holding up the market in the South and East are less than sturdy. Investors will hold on to their purchases for the foreseeable future to ensure capital growth, preventing a renewal of buyers to keep the market ticking over. The amount of stock is limited as many await signs of economic recovery before they launch into a house sale, again falsely propping up prices. "In May, there could be a deluge of property on to the market following the election, which will slow down price," says Ivor Dickinson, the managing director of estate agent Douglas & Gordon. "Until then, I envisage property prices rising 1 to 2 per cent each month." Add rising unemployment to surplus stock and prices could start to fall again.

All these issues in the South are holding the North and parts of the Midlands hostage. The November property price index from findaproperty.co.uk shows that where the East and London saw modest price rises of 0.6 per cent and 0.3 per cent respectively, the North-east saw a dip of 2.1 per cent and in Scotland prices fell 0.8 per cent, bringing them under the national average of £150,000. Price falls have been worst in suburban areas where excess stock and low chances of good rental yields have kept investors away and prices low.

"The minute you go into northern suburban towns with a large meaningless block of apartments you're in trouble," says Stuart Law, the chief executive of property investors Assetz. Manufacturing areas are traditionally hit hard by recession. Despite increased affordability as prices fall, residents are often more cash strapped and at greater risk of becoming unemployed. This makes selling even more difficult.

However, city centre properties, mainly apartments in towns such as Manchester and Birmingham, are recovering as developers give discounts to investors. "In the prime cities in the North, house-builders are quietly shifting stock," says Mr Law. "Well-finished and managed developments are in great demand and those who invest in them are soaking up excess stock and providing the underpinning for the market." Property developers will struggle to get finance for city-centre development in the future, so as demand increases and supply remains constant, we should see a good price recovery and capital growth for those who have invested.

It is no surprise that prices in the North and Midlands are not competing with London and the South. "It's always been London first and the North second," says Mr Law. "The North will follow in due course. Once the excess stock has gone, the market will normalise and will steer a move in a similar vein to what has happened in London. But you can't have a buoyant market in a city where there is a lot of distressed stock."

For those trying to sell their homes in a difficult market, the starting block is an accurate valuation. "If your property is priced correctly then it will stand out against the competition, but if you overprice your property, it will not compete in the higher-price bracket," says Mr Noel-Buxton. "You've only got one shot at getting it right."

"Mystery shop your estate agent as a buyer and see how energetic they are about selling your property," adds Miles Shipside, a commercial director at property website rightmove.co.uk. "The danger is that estate agents get stuck in a winter slow-down and you need to keep the momentum going." Motivate them by offering tiered commission so they get a higher percentage should they achieve a higher price.