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The rate of house price inflation across UK cities accelerated in the three months to April. Low mortgage rates and a continued improvement in the economic outlook are supporting demand although mortgage approvals were 11% lower in 2015Q1 than the previous year due to the General Election. Despite this a lack of housing for sale continues to keep an upward pressure on house prices, a trend that looks set to continue over the rest of 2015.
The annual rate of growth across the 20 city composite index is running at 9.0%, broadly unchanged since December. In the three months to April house prices grew by an average of 1.4% per month – this is higher than over the same period in 2014 (1.2%) and the highest 3 month average rate of growth for a decade (Figure 1).
City level house price inflation continues to exceed the UK rate of growth which is running at 6.8% year on year (figure 2). At a city level the annual rate of growth ranges from 3.5% in Liverpool to 11.0% in London. This is the smallest spread in city level house price inflation since 1996.
Figure 3 shows the annual rate of growth at a city level in April 2014 and April 2015. There has been a marked slowdown in the rate of growth in London, Oxford, Cambridge and Bristol but despite stretched affordability levels growth continues to hold up as prices rise in lower value areas within these cities. Glasgow has registered a significant uplift in the rate of growth from -0.4% to +6% with smaller increases in the rate of growth also recorded in Edinburgh, Sheffield and Manchester.
Anticipation of the General Election had a modest impact on levels of market activity. Demand for mortgages was down 11% in the first quarter although this re-bounded by 16% in March according to the latest data from the Council of Mortgage Lenders (CML).
Housing demand has been spurred by record low mortgage rates and an improving economic outlook encouraging more buyers to enter the market. This, together with changes to stamp duty announced in December, has sustained the level of house price inflation across the 20 cities.
The boost to buying power afforded by low mortgage rates, and the knock on impact for house prices, cannot be understated. Average mortgage rates today (2.7%) are more than half the level at the end of 2007 (6%) when the financial crisis hit. Low mortgage rates have been filtering into pricing levels as the economic outlook improves. This has been most evident in London and other cities in southern England. House prices in London are 35% higher than they were in 2007. There is plenty more capacity for catch-up in house prices. Across 11 of the twenty cities, average house prices are still lower than in 2007 by as much as 15% in Liverpool and 49% in Belfast (figure 4).
Tougher affordability tests for those buying with a mortgage, introduced a year ago, were in part designed to limit so-called ‘upside risk’ from a runaway re-pricing of housing from low mortgage rates.
Housing demand has been spurred by record low mortgage rates and an improving economic outlook.
The picture is complicated by the fact that demand for housing isn’t solely reliant on buyers using a prime mortgage. Homeowners buying with a mortgage accounted for two thirds of housing sales in 2014. The other third of transactions were funded by cash or with an investor using a buy to let mortgage. The linkage between affordability and a buying decision for these latter two groups are different than for those utilising a prime residential mortgage. It is important to note that published house price indices vary in the extent to which they pick up the impact of these different groups of buyers on prices.
One important trend over the last 8 years has been a decline in the proportion of existing mortgaged homeowners moving – down to just 35% of all sales in 2014 – down from 50% a decade ago. Fewer moves by existing mortgaged homeowners, who own half of owner occupied housing, constrains the volume of supply coming to the market.
High moving costs, an inability or unwillingness to move and take on debt are factors driving a lower share of sales by existing mortgaged owners. Low inflation is also an important factor as it shrinks the value of debt more slowly than in the past. Together with mortgagees taking longer mortgage terms to pass affordability tests this presents challenges for the overall liquidity of the housing market with possible knock on impacts for the volatility of house prices.Fig. 3 - City house price inflation - April 2014 v 2015
While overall transaction volumes have picked up from their lows of 2009, as we reported in February, the long run trend over the last 20 years has been for a smaller proportion of private housing to change hands each year. In 2014, the 1.2 million housing transactions equated to a turnover rate of 5.1% or a private household buying a home every 20 years.
Figure 5 show the number of years between moves across the 20 cities in the year to date compared to the 5 years between 2003 and 2007. The average between 2003 and 2007 was a move every 14 years. This has now increased to 21 years although it is down from 28 years in 2009.
The spread in market liquidity varies between cities and in lower growth cities such as Liverpool and Birmingham remains above average. The analysis highlights the extent to which the housing recovery to date has been off a smaller base of housing sales. There is some way to go before we can consider the recovery more balanced.
Fig. 4 – House prices relative to 2007 peak
Figure 5 - Years between moves at city level
Average UK city house prices have increased at an annual average rate of 4.4% per annum. While price falls in the latter part of 2018 suppressed the annual growth rate, these have dropped out of the annual growth calculation and explain the increase in the current annual rate of growth. The outlook for 2020 will be driven by affordability factors. We expect city house prices to increase by +3% over 2020 with above average growth in the most affordable cities and below average growth in cities across London and southern England.
UK city house price inflation is higher as prices start to firm up in London and Southern England. Large regional cities continue to post above average price growth on the back of rising demand and attractive affordability, supported by low mortgage rates. London is experiencing its highest rate of growth for 2 years and follows a period of modest price falls.
HPI is currently running at +2.4%, half the average growth over the last five years, and below average earnings growth. Time to sell has hit a 3 year high, while discount to asking price has widened across UK cities. Despite this, underlying market conditions still vary widely across large areas of the country.
With HPI moderating at 1.9%, it appears the slowdown in house price growth is an indication of a return to a more sustainable pace of price growth. However, a change in buyer mix from cash buyers to those with mortgages, plus wide variance in the recovery of house prices is sending mixed signals about current housing market activity.