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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.
UK city house price inflation hits 2 year high
UK city house price inflation is running at +3.9% as the impetus for price growth increases in regional cities with attractive affordability and positive price growth in London (+1.9%) supporting the headline growth rate.
City house price growth is at a two-year high, supported by a combination of 1) flat to falling house prices in the latter parts of 2018 falling out of the annual growth rate and 2) increased demand and more sales – HMRC data shows sales in December 2019 were 11% higher than in December 2018 and 1% higher over the last quarter of 2019 than the previous year.
Range of price growth narrows across cities
Cities in the North and Midlands registered stronger price growth during the year than many cities in the south of England. The regional nature of the housing market is still very clear, although there are signs that the spread of price growth across the country has been narrowing in recent months, standing at 9.2 percentage points in December (the gap between Edinburgh at 6.1% and Aberdeen at -3.1%) down from 13.5% at the start of 2018.
Cities ranked on prospects for 2020
An examination of market fundamentals by city - including housing affordability, position in the current housing cycle, discounts to asking price and time to sell - indicate cities where the momentum in growth over the final quarter of 2019 will likely carry over into 2020. The ranking for all cities is shown in Table 2 along with the current annual growth rate.
Nottingham, Edinburgh and Glasgow rank as the top three cities with the strongest prospects for 2020, indicating they will be towards the top end of a relatively narrow range of price growth for 2020.
Conversely our analysis of market fundamentals suggests more constrained price growth in the South of England, in cities such as Bournemouth, Southampton, London and Oxford, largely a result of affordability factors. London ranks 16th but we expect sales volumes to rise faster than prices. Average house prices are still on a downward trajectory in Aberdeen although demand is increasing.
Housing demand ‘bounces’ 26% higher
There is much focus on how much the demand for housing has ‘bounced’ in the early weeks of 2020. Looking at the 4 weeks to 20 January 2020, demand for housing across UK cities is, on average, 26% higher than the same period in 2018 and 2019. Figure 2 shows how demand has grown above and below the average. All cities, except for Belfast (flat), have recorded an increase in demand compared to the last 2 years.
Northern cities record strongest increase in demand
Sheffield, Leeds and Leicester have recorded the greatest increase in demand over the first 4 weeks of the year. Southampton and Edinburgh have registered below average growth in demand.
We should note that demand for housing in Edinburgh remains strong overall, hence the 6% annual growth in prices over 2019, but demand has moderated in the first 4 weeks of the year compared to the last 2 years. While prices are falling in Aberdeen there are signs of increased demand, albeit off a low base.
Boost to sales volumes rather than faster price growth
Our expectation is that the boost to demand will support a much-needed increase in housing sales rather than a further acceleration in house price growth over 2020.Fig. 3: Cities Index comparions year-on-year, 2007 to date
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%.
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.