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February saw a notable and unseasonal acceleration in house price growth across UK cities according to the latest Hometrack UK Cities House Price Index. Overall city level house price inflation increased to 11.0% up from 8.1% a year ago, the highest annual rate of growth for almost 18 months.
City house price growth ticks higher again
City level house price inflation increased to 11.0% in February, up from 8.1% a year ago and the highest annual rate of growth for almost 18 months.
Table 1- UK 20 city index summary, February 2016
Source: Hometrack House Price Indices
Unseasonally strong growth
There has been a notable and unseasonal acceleration in house price growth in the last three months across most large regional cities thanks, in part, to a temporary increase in demand from those looking to beat the stamp duty increase for second homes from April onwards.
Not all down to investor rush
Increased demand from existing home owners in cities where the economic recovery has been less pronounced is an important underlying theme given that the majority of housing sales (80%) continue be driven by home owners.
Fig. 1 - 20 cities index %yoy and %mom
Source: Hometrack House Price Indices
Growth rate higher in 16 of the 20 cities
16 of the 20 cities covered by the index have registered an increase in the annual rate of house price growth increase in the last year. Some regional cities are recording their highest growth rates for over a decade as the recovery in house prices gains momentum. Four cities have seen the rate of growth slow with the greatest slowdown in Aberdeen and a loss of momentum in Belfast where a modest recovery appears to have stalled with house prices still 45% down on their 2007 levels.
Five regional cities stand out for pick up in growth
Five cities stand out based on a material increase I the rate of house price growth in the last year. These are led by Portsmouth and Leeds where house prices are rising much faster than earnings at between 8% and 9% per annum – see table 2.
Portsmouth, Nottingham and Birmingham are recording the highest rates of annual house price growth for over 10 years while Leeds and Glasgow have the highest growth rates for over 8 years. All these cities have seen a continued pick up in house price growth since 2013 on economic growth, an improving employment outlook, earnings growth and low mortgage rates.
There are no consistent patterns as to the types of property driving higher growth in these five cities. In Portsmouth detached homes are rising at twice the rate of the city which is the same trend, with a lesser degree of magnitude, in Nottingham. In Birmingham the highest growth rate is being recorded for flats (11.3% against 7.0% for the city) while in Leeds terraced houses (11%) are recording the highest growth compared to the city (7.8%).
High growth cities starting to slow
The four high growth cities of London, Bristol, Oxford and Cambridge continue to record double digit rates of house price inflation but there are signs that the rate of growth is starting to slow. All these cities recorded a small drop in the headline rate of growth over February as affordability and sentiment factors impact pricing levelsFig 3 - Early signs of growth turning in London
A closer analysis of the 46 local authorities that cover the London City area shows the average growth rate in the last quarter is approaching half the rate recorded, on average, over the last 12 months. Slower growth is inevitable in these markets as affordability pressures constrain demand.
Near term prospects
While prices are moving higher, the very latest data on residential transactions from HMRC shows non-seasonally adjusted sales in February running 10% lower than sales over 2015H2. A similar pattern of lower lending volumes is revealed in the latest CML estimates for overall mortgage lending. It remains to be seen the extent to which the Referendum vote and policy changes will impact market volumes and price growth at city level. A change in the balance of house price growth is set to emerge in 2016 with further price growth to come in regional cities. In contrast, we expect growth in London to slow in the face of more price sensitive demand and where the implications of a Brexit vote and the impact of policies targeted at investors will have the greatest impact over 2016.
There has been continued growth in large regional cities, despite house price inflation slowing to 5.4%. ZPG listings data shows discounts to asking prices are narrowing, indicating market conditions are improving across cities outside south eastern England. Increased discounting can be seen in London, where price growth has slowed to +1.8%.
City house price inflation has increased to 6.3%. The fastest growth is being registered in cities which have recorded the weakest growth since 2009. We expect city house prices to increase by 5% in 2018.
City house price inflation is 6.1% as price growth picks up speed, driven by regional cities where affordability levels, measured on a price to earnings basis, are in line with the 15-year average. In London affordability is at an all-time high of 14.5x earnings.
City house price inflation is running at 4.9%. Edinburgh is the fastest growing city, overtaking Manchester. House price inflation across London City is 2.3% although low growth means 85% of markets are registering price falls in real terms. We consider the outlook and the impact of a possible increase in interest rates.