Savills Research has recently published its annual house price forecasts and they are sticking to their prognosis, first published over a year ago, that average, mainstream UK property prices will experience a ‘second slip’. But, they say, never have there been bigger differences in the outlook for the best properties versus the rest and for London and the South of England versus the North.

Mainstream values are now expected to fall by a total of -7.3% between mid 2010 and end of 2011 (some of these falls have already occurred, with -3% expected to occur in 2011). This compares to total falls of just 3.5% expected in prime central London over the same eighteen month period (with just -1.0% in 2011).

“Unlike the doomsters, we are not forecasting a deep double dip and there will be tiers of the market – like grade A prime London properties - that may well escape the downturn virtually unscathed,” said Yolande Barnes, head of residential research at Savills.

“It is the detailed forecast that counts. We have not only varied our prognosis for different regions and for prime versus mainstream, but we have also varied them for the most desirable, owner-occupied properties (grade A) versus poorer quality, tenanted stock (grade C), compared to the average (grade B). These distinctions will make a big difference to longer-term performance and we expect markets rich in equity to operate very differently to those historically heavily reliant on mortgage finance.”

As a result, the Savills forecasts for the prime locations and high quality residential property are that values will significantly outperform the UK mainstream housing market over the next five years, both in the pace and scale of growth.

“We expect to see a growing division between the equity rich, owner occupied grade A stock at one end of the mainstream market and grade C stock at the other, the latter dominated by low levels of owner occupation and equity and high levels of renting,” says Barnes.

“While the market waits for new investors, there will be a shortage of rental stock coupled with minimal demand from owner-occupiers on the bottom rungs of the housing ladder,” claims Barnes. This combination, she thinks, is likely to suppress capital growth for grade C stock over the medium term but could, simultaneously, lead to an increase in rents.

“Only when this combination raises yields to a level that attracts potential large-scale investors will we see grade C values rise again. This marks a significant and permanent structural change in the UK residential property market as the value of these properties will be driven in future by the size of incomes that they produce and investor sentiment rather than by owner occupiers and mortgage lending”.