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February 2015 - Hometrack House Price Cities Index

On 27 March, 2015
  • House price inflation across the 20 city composite index slowed to 10% in February year on year. This is higher than the 7.5% growth registered across the UK.
  • City level house price inflation ranges from 3.7% in Newcastle to 12.9% in London.
  • Rising transaction volumes are a precursor to house price growth. Housing sales in the last year are up by as much as 35% in cities where the growth in house prices has been low. Sales volumes are starting to fall back in high growth, high value cities as demand cools.

House price inflation across the 20 city composite index was 10% in the year to February, down from a high of 11.9% six months ago. The average rate of growth in UK cities is higher than the UK as a whole where house price growth has slowed to 7.5% over the same period (figure 1). The 20 cities composite index covers markets that contain 35% of UK housing by volume and 43% by value.

At a city level the annual rate of growth ranges from 3.7% in Newcastle to 12.9% in London (figure 2). The main trend is a continued slowdown in growth in the higher value cities while price growth continues to pick up momentum in regional cities.

We expect house price growth in regional cities to continue to recover as market activity increases on improved economic conditions and low mortgage rates. Figure 3 shows the spread in the profile of recovery in residential values in selected cities since 2007. In the last quarter the highest growth rates have been registered in Glasgow and Liverpool where average values are still 13% and 15% below peak.

The pre-cursor to house price growth is rising demand and growth in transaction volumes. In the last 12 months all cities outside the south east of England have registered a 15% to 35% uplift in the volume of housing sales when compared to the average over the previous 5 years. In contrast, sales volumes in the high growth cities are starting to level off while, looking at 2014 in isolation, sales volumes have fallen as demand weakens on stretched affordability.

In order to illustrate the recent growth in housing sales figure 4 compares the level of housing transactions in 2014 against their 5 year average and house prices relative to their peak. The size of each bubble indicates the average price in the city. The strongest growth in sales volumes has been in Belfast +35%, Leeds +23%, Portsmouth +23% and Liverpool +22%.

 

 

Table 1- City level summary, February 2015
Source: Hometrack House Price Indices

 

The high value, high growth cities, where prices are more than 25% above their 2007 peak, are registering slower growth in transaction volumes. Oxford, Aberdeen and Cambridge all registering growth of just 5% compared to the 5 year average.

All the high growth cities recorded a year on year fall in sales volumes in 2014 - Cambridge -13%, Aberdeen -7%, Oxford -1.6% and London -1%.

The question is whether transaction volumes are likely to slide further in these high growth cities or whether this is something of a normalisation after a particularly strong phase of house price growth?

While mortgage rates remain low and the economy continues to expand, so the upward pressure on house prices will be maintained albeit at a slower rate. Stretched affordability levels in these cities, with price earnings ratios in double digits, will impact demand from mortgage reliant buyers. However, one in three sales nationally in 2014 went to cash buyers or buy to let investors.

House price inflation varies between markets and whether developing, investing or lending into local housing markets these local differentials are important.

Fig. 1 – House price inflation (%yoy)
Source: Hometrack House Price Indices
Fig. 2 – City house price inflation (Feb-15, %yoy)
Source: Hometrack House Price Indices

House price growth is holding up better than expected in London where house prices have grown by an average of 0.9% per month in the last quarter compared to just 0.1% in the final quarter of 2014. The impetus for house price growth in London is coming from outer London market and the surrounding commuter areas as improving economic conditions stimulate demand in lower value areas.

In central London small, single digit price falls are now being registered after very rapid price rises in the last 5 years. Here demand is cooling on recent tax changes for overseas buyers and fears over mansion tax proposals.

The London market is currently in transition from a high growth to lower growth market and different measures of house prices will pick this up to differing degrees. Asking prices take the brunt of any re-pricing in the market as agents manage them to levels that will support transaction volumes.

We expect house prices in the regional cities to continue to grow as pent-up demand returns to the market on the back of an improving economic outlook and better affordability dynamics. We don’t expect to see an acceleration in the rate of growth in regional cities and predict year on year growth of c.3-7% will be maintained in 2015. 

Fig. 3 – House price index from 2007 - selected cities
Fig. 3 – House price index from 2007 - selected cities
Source: Hometrack House Price Indices

With a lot of focus on house building and the low level of new starts, the pick-up in market activity and price levels in cities outside the south east is positive news. House builders will gain confidence from rising demand. The failure to grow supply in recent years is down to the fact that the housing recovery has been largely one-dimensional - focused on London and its key commuter cities.

Elsewhere demand has remained supressed and house builders have adapted their product to fit in with the profile of demand resulting in a shift towards building 3 and 4 bed family homes for households with equity. For the major builders a third of sales have been assisted with schemes such as Help to Buy. An improving outlook for transactions should translate into increased development activity.

However, while the pick-up in transaction volumes is welcome news, the number of sales is still around a third lower than the level seen in 2007. Pent-up demand is returning to the market in regional cities but the housing recovery is still far from being broad based. The growth in house prices tends to be focused on higher value areas within cities, where households have equity and find it easier to access mortgage finance.

February 2015 - Hometrack House Price Cities Index
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