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House prices are rising but sales volumes have fallen in the last year. Higher stamp duty for those buying second homes and the EU referendum are set to impact growth in sales volumes in 2016 and the rate of growth, especially in southern England where these policy and external factors are likely to bite the most.
City house price growth still in double digits
Annual house price growth across the Hometrack UK Cities index was 10.1% in January 2016, up from 8.6% 12 months ago. Four cities continue to record double digit growth rates – London, Cambridge, Bristol and Oxford. Across the remaining sixteen cities, house prices are rising at an annual rate of between 3.6% and 8.6% with the exception of Aberdeen where prices are 4% lower than a year ago. Across the high growth cities, there are signs the annual rate of growth is starting to plateau as sales volumes slow and affordability pressures grow – figure 1.
Table 1- UK 20 city index summary, January 2016
Source: Hometrack House Price Indices
In most cities the current level of house price growth is moderately higher than a year ago, with the exception of Cardiff, Southampton and Belfast where the year on year rate of growth has moderated.
Changes in sales volumes greater than house prices
The acceleration in house price growth in the last 3 years has been on the back of a 34% increase in residential turnover across the 20 cities covered by the index – see fig 2. In cities that saw the greatest downturn in market activity between 2007 and 2009 the bounce-back in sales has been as high as 63%.
This growth in turnover came to an end over 2015 with sales volumes down 2% overall and falling by as much as 20% in Cambridge and 7% in London. Just seven cities recorded higher sales in 2015 and only Edinburgh and Glasgow recorded a double digit increase in turnover over the year.
Based on the evidence from Scotland, the EU referendum will impact market activity but the initial impact period will be shorter.
Slower growth in sales volumes has been a trend seen over the last 3 years across the high value, high growth cities such as Cambridge, Oxford, Aberdeen and London where house price have been rising for six consecutive years. High housing and moving costs are limiting access to the market for a growing number of households which, in our view, will result in lower turnover and slower house price growth.
We see further upside for housing turnover in regional cities outside south east England where growth in jobs and incomes will stimulate further housing demand in the medium term
2016 turnover impacted by external factors
However housing market activity is likely to be impacted by external and policy factors such as the EU referendum and stamp duty changes for investors and second home owners. These are both likely to stall any recovery in housing turnover, not least the extra stamp duty for investors who accounted for 1 in 5 sales in 2015.
The stamp duty impact will be felt most in high value cities with large rental markets which are the cities where sales volumes are lower and house price growth is starting to slow. Anecdotal reports of more supply coming to the market will compound these trends. This supply is coming from vendors looking to take gains and mortgaged investors sell to deleverage in low yielding markets where interest tax relief changes will bite the most.
Impact of EU referendum
The EU referendum adds a further dimension of complexity to what is already a complex picture for UK housing. An analysis of housing sales in Scotland over the 18 month independence referendum shows 10% fewer transactions relative to England and slower house price growth. The shorter EU campaign will help but the true impact is how quickly the EU campaign focuses on the economic consequences for households the extent to which it directly impacts housing related decisions as it did in Scotland. A vote to ‘Remain’ will see a return to business as usual in 2016H2 while a vote to ‘Leave’ would increase uncertainty and market activity over a longer period.
City level house price inflation is running at 6.9% while growth in London (6.4%) is running at its lowest level for 4 years and set to slow further. House prices in many regional cities where the recovery has been muted have material upside so long as the economy continues to grow and mortgage rates remain low.
House price inflation in Manchester hits 12 year high. Growth in regional cities continues to overhaul London which dropped to 7th in the city house price growth rankings for 2016. Bristol is still the fastest growing city +9.6% but could be overtaken by Manchester in Q1.
City level house price growth is running at 7.7%, in line with our projections this time last year. We expect city house price growth to slow to 4% in 2017 with weaker growth in London and other southern cities offset by sustained growth in large regional cities.
City level house price growth is holding steady at 8.4%. This month we reveal an updated view on city level affordability. This finds that after an 86% uplift in house prices since 2009, the price to earnings ratio in London now sits above 14x with Oxford and Cambridge close behind. Other cities are at or below their long run average. Read the Report to find out what this means for city level house price inflation.