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UK house prices ended the year 8.3% up in 2014 according to the Hometrack UK Cities House Price Index. The rate of growth increased over the year, up from 4.5% in 2013 and 1.1% in 2012.
The rate of growth over 2014 varied by ten percentage points across the 20 cities covered by the index. Liverpool registered the lowest increase at 4.7% with London the highest at 14.7%.
Thirteen cities registered house price inflation below the UK average, showing the influence of a strong London market on the headline rate of growth.
As the recovery in UK house prices has spread so the gap between the best and worst performing cities has narrowed to its lowest level for 15 years.
There are now two distinct groups of cities. Firstly those where the level of house price inflation has continued to increase off a low base, after years of either static or falling prices. Second, those that have enjoyed strong house price recovery over the last two years but where house price growth is starting to slow off a high base on price sensitive demand and affordability constraints.
Figure 1 shows the distribution of house price growth at city level ordered on growth in the year to December 2014. The year on year rate of growth in June 2014 is shown as a comparison.
Four of the top 5 cities for house price growth have seen the rate of growth slow over 2014H2 led by London, Oxford, Bristol and Cambridge.
Of the higher growth markets only Aberdeen has seen an increase in the rate of growth in the second half of 2014. Aberdeen has been the fourth strongest performing city since 2007 thanks to increased investment in the oil and gas industry which has boosted jobs and demand for housing. Falls in the oil price and early signs of reduced investment is starting to impact demand and house prices are starting to register small falls.
The Scottish cities have led the acceleration in house price growth over 2014H2 supported by the removal of uncertainty created by the independence referendum. Edinburgh has been the strongest performer with year on year growth up from 4.4% in June to 10.1% by December.
Eleven cities grow and seven slow as disparity in house price inflation narrows
Other notable pick-ups in the annual rate of growth have been registered in Newcastle, Liverpool and Leicester where growth is off a low base and currently ranges from 4.7% to 7.1% year on year. These cities saw house prices bottom out in 2012 and average values today are still below their 2007 peak level by between 2% and 15%.
House price growth at a city level looks set to converge further in the first half of 2015 as high growth markets continue to slow and lower growth markets start to see growth plateau. Pent-up demand has fed back into the market in the last 2 years, supported by record low mortgage rates, but mortgage approvals have slowed in recent months.
Low mortgage rates are making housing look affordable but it is the willingness and ability of households to borrow that will most influence the housing market in 2015. It’s a balance between the positives of continued economic growth and rising earnings against greater mortgage regulation and affordability constraints.
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.