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City house price inflation is being sustained by above average growth in regional cities while prices in London have stabilised but are falling in real terms. New analysis finds the value of housing across UK cities exceeding £3 trillion of which two thirds is accounted for by London.
City house price growth 4.9% yoy
UK City house price inflation is running at 4.9% compared to 6.6% in August 2016 (fig. 1). After weak growth over 2016H2, the 3 month growth rate has increased over recent months.
Falling unemployment and record low mortgage rates are supporting demand as house prices in large regional cities continue to increase off a low base (fig.2). Manchester is the fastest growing city (7.3%), followed by Birmingham (6.7%) and Edinburgh (6.6%).
In contrast, low house price inflation in London is acting as a drag on the headline rate of growth. House prices in London are currently falling in real terms. The nominal growth rate of 1.9% is below the general rate of inflation (2.9%, CPI). Other high capital value cities such as Cambridge and Oxford have also registered a steep slowdown in the rate of price inflation over the last 12 months as affordability pressures constrain housing demand.
Value of housing across UK cities exceeds £3.0trn
Residential values have been rising for eight years, boosting the total value of homes and the amount of equity locked up in housing. Using Hometrack’s automated valuation model we estimate that the total market value of private housing across the 20 city index is £3.013 trillion (£3,013bn). This is 43% of the value of the whole UK housing market (£7trn or £7,000bn). The value of housing in UK cities has grown by £89bn over the last 12 months.
London City, which covers London and its commuter hinterland, contains 39% of the homes across the 20 city index but accounts for 66% of the total value of housing (£2.0trn or £2,000bn). Birmingham (£152bn) and Manchester (£133bn) are the next highest value cities, together accounting for 10% the value of housing within UK cities. To put these numbers in context, the market capitalisation of FTSE 100 companies stands at £1.9trn while total mortgage debt is £1.322trn.
Housing equity in cities exceeds £2.4trn
At the end of 2016 there was £610bn of outstanding mortgage debt secured against the value of housing across the 20 cities. This mortgage debt represents 20% of the value of all private housing, leaving £2.4trn of housing equity across UK cities. Figure 3 plots the proportion of housing value that is accounted for by outstanding mortgages and housing equity by city.
Housing equity as a share of private housing value ranges from 87% in Oxford to 69% in Aberdeen. A significant amount of this equity is accounted for by homes owned with no mortgage at all, typically older households who have paid off their mortgage.
Cities that have recorded the highest house price growth in recent years have a higher share of equity as a proportion of total market value. Conversely cities that have registered weak price growth have a lower proportion of housing equity.
Developing ways in which households can leverage or access this housing equity is a large opportunity for those developing financial or housing products to help households release equity while staying in their home, or to free up equity by moving home.Fig. 3 - % housing value split by equity and debt
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.