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House price growth across UK cities continues to accelerate on rising demand. Home owners as important in driving demand as private investors. Cambridge and London lead growth although sales volumes in these cities are lower over 2015. Impetus for growth continues to come from regional cities, like Liverpool and Glasgow, where prices are rising off a low base. Buy to let policy changes are driving some behaviour – but 8 out of every 10 sales are still to owner-occupiers.
House price inflation at 15 month high, while sales volumes flatten
Hometrack’s UK Cities House Price Index has recorded a further jump in the annual rate of house price growth to 11.4%, up from 10.2% the previous month and 8.9% twelve months ago. This represents the highest rate of growth for 15 months as demand increases in the face of constrained supply.
HM Revenue and Customs data shows a 10% increase in sales volumes over the final 3 months of 2015 compared to the same period a year earlier. However, over the year sales volumes in 2015 are broadly similar to 2014. Mortgage lending data also points to a stronger end to the year.
Cambridge and London – twin cities?
Cambridge continues to perform like London and has registered the highest annual rate of growth at 14.4% followed by London (13.8%) and Bristol (12.8%). All these high growth markets are growing at a broadly similar rate to the levels seen a year ago. Residential values may be rising but overall sales volumes across Cambridge and London look on track to be lower over 2015, bucking the national trend of flat volumes, as scarcity of homes for sale and affordability pressures limit overall volumes.
Falling oil price impact price growth in Aberdeen
Turmoil in global financial markets is raising concerns over the impact on the UK economy and possible knock-on impacts for the housing market. Housing demand in Aberdeen has already been impacted by global events, not least the slide in the oil price over 2015. The annual rate of house price in Aberdeen has slowed from +13.5% a year ago to -1.4% today and looks set to remain weak over 2016. Newcastle and Sheffield are recording the next lowest growth rates of 3.7%, still higher than average earnings, and in cities where the housing recovery is at a much earlier stage.
Regional cities continue to be the impetus for growth
Looking across the 20 cities the impetus for growth continues to come from regional cities where prices are rising off a low base as household confidence improves and home owners utilise record low mortgage rates to access the market. Glasgow and Liverpool have recorded a significant increase in house price growth over the last 12 months in cities where the recovery has been running for just 2-3 years. A year ago Glasgow price inflation was running at 0.1% but this has risen to 8.5%, similarly Liverpool price growth is up to 5.7% from 1.3% a year ago. (Explore the Interactive graph here)
Impact of buy to let tax changes: important, but overstated
A quarter of homes in the 20 cities covered by the index is private rented property and strong private investor demand will explain some of the additional growth in city level house prices relative to the UK rate of growth. Much has been made of the impact of tax changes for buy to let investors with mortgaged property and the proposed new 3% stamp duty levy from April 2016. The latest Bank of England Credit Conditions Survey for 2015 Q4 points to expected strong demand for mortgages from buy to let landlords in 2016 Q1.
Demand for buying property as an investment is far from dead and 2016 looks set to be a year of consolidation for investors, especially those who are mortgage reliant. A portion of investors are likely to accelerate purchases before April but we should not read too much into the extent to which this is pushing house prices higher. The reality is that those buying a property to live in still account for around 8 in every ten sales. There is likely to be some net selling by some investors in 2016 to support de-leveraging of portfolios in order to reduce tax liabilities. This will bring much needed new supply to the market, especially for smaller sized homes, but insufficient to materially change the balance of supply and demand.Chart 3 – Year on year growth Aberdeen v UK
Outlook for 2016
In the very near term the current momentum in house price growth looks set to continue but we expect this to moderate over 2016 as slower growth in investor demand post March stamp duty changes and affordability pressures result in a moderation in the rate of growth (although we and others have been saying affordability pressure should start to limit growth for some time). Regional cities in particular have significant further upside in our view especially given the more dovish outlook on the trajectory of interest rates suggested by the Governor of the Bank of England. The current turmoil in global financial markets is likely to further weigh on demand and activity in central London more so than other cities in the near term.
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.