EY: UK house prices to surge over 20% by 2016

After a rapid rise in house prices in the U.K. this year, particularly in the capital London, recent data suggest the market is beginning to cool -- but house buyers should still expect around 20 percent growth in the next two years, according to the latest forecast.

House prices in the U.K. will increase around 20 percent by 2016, as 9.6 percent growth is expected this year, 7.4 percent next year before easing to 4.2 percent in 2016 forecasting group EY ITEM Club have said in their Autumn forecast.

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Skyscrapers  stand on the horizon beyond rows of residential houses in London, U.K.
Bloomberg via Getty Images
Skyscrapers stand on the horizon beyond rows of residential houses in London, U.K.

The group also sees investment in U.K. housing overtaking its 2004 peak in 2015 after what they describe as a "decade of lost time".

"The outlook for the market is mixed. On one hand, continued strong population growth, a pick-up in household incomes and a further easing in credit conditions are all supportive of further robust price growth. However, there are several negative forces which are set to weigh on activity and prices," EY's chief economist, Mark Gregory said.

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Rising interest rates, very rapid growth in London house prices and the south east together with the Bank of England's Financial Policy Committee's restrictions on mortgages are all headwinds for borrowers Gregory said.

"A pick-up in house-building should also help to keep a lid on prices. Thus far, there has been a strong response to rising prices from housing supply, with residential investment up 12½ percent year-on-year in Q2 2014," he added.

House prices fell for the first time in 17 months, dropping by 0.2 percent in September, providing new evidence the property market is easing, the latest update from the U.K.'s biggest building society Nationwide said at the end of last month.

The group also predicts the gross domestic product growth will slow to 2.4 percent in 2015, down from the expected growth of 3-plus percent this year, as consumer spending cools.

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Interest rates will remain on hold until next spring, EY ITEM Club said as "caution" will be the order of the day.

"Mortgage lenders and borrowers have already shown greater restraint following the Mortgage Market Review and the prospective increase in interest rates. Given the weakness of commodity prices and wages I doubt that the MPC will be in any hurry to raise interest rates," chief economic advisor to the EY ITEM Club Peter Spencer, said.

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