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City house price growth is running at 5.3%, down from 8.7% in April 2016. Eleven cities have a faster rate of growth than 12 months ago. Manchester is the fastest growing city while price inflation in London is at its lowest level for 5 years.
City house price growth 5.3%yoy
Headline UK city house price inflation has slowed to 5.3%, down from 8.7% in April 2016. Lower growth over the last 12 months is largely a result of prices increasing by just 0.1% over 2016H2. In the three months to April 2017, average prices have increased by 3.2% with above average growth recorded in large cities such as Manchester (4%), Birmingham (3.8%) and Edinburgh (3.7%).
Divergence in growth rates over last year
Eleven of the twenty cities are registering higher growth than at the same time a year ago (Fig. 1). This includes Aberdeen where price falls have moderated. Annual price growth is lower across nine cities with a material slowdown in the highest value, most unaffordable cities such as London. Manchester continues to register the fastest growth rate of 8.4%, up from 6.3% a year ago. The ratio of sales to new supply in Manchester indicates relatively tight housing supply which points to continued upward pressure on house prices.
Cities in the Midands registering robust growth
Other cities with above average growth include Leicester (7.7%), Birmingham (7.7%) and Nottingham (7.2%). Fig. 2 shows that rates of growth in regional cities are overtaking growth in previously high growth cities such as Bristol and London.
Rapid price deceleration in most unaffordable cities
The scale of the recent deceleration in house price inflation across cities in southern England is stark. London, Cambridge, Oxford and Bristol have all seen the rate of growth slow from double to single digits over the last year. This steep deceleration in growth reflects weaker levels of demand from home owners and investors in the face of affordability constraints, tax changes and weaker market sentiment.
Current trends consistent with mortgage demand
Data from the Council of Mortgage Lenders show the numbers of mortgage borrowers in the first quarter of 2017 are the same or higher than the first quarter of 2016 in all regions outside southern England. Only in London were mortgaged homeowner numbers materially lower, down by 19%, on 2016 Q1. Lower numbers were also recorded in the South East (-9%) and South West (-6%). Taken together with a 30% decline in buy to let purchasing it is clear that demand for housing in southern England is moderating and impacting price inflation.
Lowest price inflation in London for 5 years
The annual rate of house price growth in London has declined from 13.0% a year ago to just 3.5% in April 2017. This is the lowest level of annual growth for 5 years. Average prices have posted a modest gain in the 3 months to April but the current quarterly growth rate is less than half the level recorded over the last 4 years (Fig. 3).
Looking ahead we expect current trends to continue with house price growth losing momentum in cities across southern England where housing unaffordability is at a record high and has priced large numbers of households out of the market. Weaker investor demand supports this trend, taking demand out of the market and adding to supply as investors look to rationalise and de-leverage portfolios in the wake of tax changes.
Real price falls in London over 2017
We expect house price growth in London City to slow towards 2-3% by the end of 2017. With the underlying level of consumer price inflation increasing this means London is set to record a real terms drop in prices over 2017, the first time this has happened since 2011.
Price rises to continue in large regional cities
Outside southern England we expect prices to continue to increase over 2017 as households take advantage of low mortgage rates and an improving economic outlook. On paper, there is material upside for prices outside southern England but much depends on how market sentiment is impacted by the General Election, rising inflation and a growing focus on the Brexit negotiations later in 2017 and into 2018.
Scarcity of homes for sale a new norm
One more certain aspect of the market is the availability of homes for sale which we expect to remain constrained. In our view this will tend to keep the upward pressure on house prices in those markets where affordability remains attractive.Fig. 3 - London City price growth at 5 year low
UK city house price growth in February 2020 was +1.6%, higher than the +1.2% a year ago. That said, in recent weeks coronavirus has had a rapid impact on housing demand, which is 40% lower in the last week. Transaction volumes are set to decline by an estimated 60% in the next quarter with a further fall in sales volumes over Q3 2020.
This month's Cities Index is the second in a row to record a 3.9% increase year-on-year. This is taking average prices up to a nearly 3-year high. Prices have now also recovered across all English cities to pre-recession 2007 levels. Supply is still flat and outpaced by demand, at 2.6%.
This month’s Cities Index shows a continuation of the strong end to 2019. City house price growth is at a two-year high, at 3.9%. Coupled with a bounce in demand, which at 26% far exceeds the traditional new year boost, we see green shoots of returning market optimism. At a regional level, affordability of local stock is driving growth forecasts for Northern and Midlands cities, while in the South, the picture is more subdued.
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.