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Housing market momentum starting to turn

By Richard Donnell on 05 October 2014
  • House price growth is running at 10% per annum but the momentum is starting to turn.
  • Analysis of Hometrack’s proprietary localised house price indices reveal a marked drop in the proportion of markets where house price growth is ‘+ve accelerating’.
  • The loss of momentum is particularly stark in London over the last quarter. Over 90% of markets in London are now classified as +ve decelerating.
  • This analysis points to a slowdown in the rate of house price growth in the coming months.

The profile of the housing recovery over the last 5 years has been far from uniform. House prices are more than 10% above their peak, 2007, levels in 15% of postcode districts - 80% of which are in London.

For the last decade, Hometrack has been running localised house price indices which form an integral part of the businesses’ Automated Valuation Model (AVM). A monthly index for each of the 3,000 postcode districts in the UK enables detailed analysis of market trends at a sub-national level.

The profile of the housing recovery over the last 5 years has been far from uniform. House prices are more than 10% above their peak, 2007, levels in 15% of postcode districts - 80% of which are in London.

In contrast, more than half of postcode districts have seen house price increase by less than 10% since their recent lows. In many areas as recently as 2012.

A turnaround in market sentiment, linked to the launch of the Help to Buy scheme in early 2013 and supported by low mortgage rates has resulted in acceleration in the rate of house price growth at a national level. Headline house price growth is running at 8.3% per annum, the highest level for almost 7 years. Yet there are wide variations in the rate of growth at a regional and sub-regional level.

Figure 1 shows the profile of house price growth at a localised level in the 12 months to July 2014. London and its commuter hinterland continue to be the engine for house price growth in excess of 14% per annum. In contrast, there are large parts of the country (81% of postcodes) where the annual rate of growth is below 10% per annum. While growth has been accelerating there are questions over the sustainability of double-digit price increases.

House price inflation (% yoy))
Source: Hometrack House Price Indices
Fig.2 - Housing market momentum – UK
Fig.3 - Housing market momentum – London

To understand the momentum in house price growth we have classified markets into one of four typologies a) +ve accelerating, b) +ve decelerating, c) -ve decelerating or d) –ve accelerating.

Tracking the proportion of postcode districts in these price growth typologies at a national, regional and local market level reveals a more granular picture on house price growth and overall momentum.

Figure 2 shows the proportion of postcodes that fall into each typology for the UK market. The results are shown across four time periods - 2 years ago, 12 months ago, 3 months ago and most recent period.

The analysis shows a build-up of momentum in house price growth with an increasing proportion of markets classed as +ve accelerating. This led an increase in the year on year rate of growth shown as a yellow triangle, from 0% 2 years ago to 10% today. The latest period reveals is a marked increase in the proportion of markets that are +ve decelerating.

Figure 3 sets out the same analysis for the postcodes that fall within the London administrative region, where the year on year rate of growth has been running at 20% per annnum. The vast majority of markets in London have been in the +ve accelerating category for over 2 years. This has reversed in the last period with the majority of markets registering positive growth but at a decelerating rate. The underlying rate of growth in these decelerating markets is 12% per annum – much lower than the year on year rate. 

House price growth is starting to lose momentum and as such we can expect a decline in the year on year rate of growth in the coming months.

Pent-up demand has fed back into the market in the last 18 months but there have been questions over the sustainability of the recent recovery. Our recent analysis shows that house prices have been driven by investor and more affluent, equity driven demand from those in managerial professions against a backdrop of low market liquidity.

Greater participation in the market by more debt-reliant households is required to sustain demand and the momentum in house price growth. However, warnings from the Bank of England and others on the sustainability of house price growth have impacted market sentiment since May.

More importantly tougher affordability checks for residential mortgages with stress rates at up to 7% are impacting demand with many households unable or unwilling to move. The piecemeal introduction of maximum loan to income caps will certainly impact demand in the high value inner areas of the London market and this looks to play out further in the months ahead.

Housing market momentum starting to turn
By Richard Donnell
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