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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.
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.
UK City HPI is running at 2.3%, with Liverpool and Edinburgh seeing growth of +6% and Aberdeen -5%. Looking at average house price growth versus growth in average earnings, we can see that affordability levels are starting to improve. Twelve cities are registering price growth that is lower than the growth in average earnings.