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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.
City house price growth 6.9%yoy
UK city house price inflation is running at 6.9%, compared to 7.9% in January 2016. The slower rate of growth is down to a 0.2% price fall in the third quarter of 2016. This is a consequence of weaker investor demand post the stamp duty changes and the impact of the Brexit vote on market activity.
London market going ‘ex-growth’
London has slipped to 8th in the price inflation rankings (figure 1). Year on year growth running at 6.4%, the lowest for 42 months (June 2013). House price growth is slowing across all sub-markets. The lowest capital value markets continue to register above average price growth (>8%) – areas with average prices of c.£300,000 or 40% lower than the London average.
The markets with the highest capital values in London continue to register modest year on year price falls of up to 3% as weaker demand feeds into pricing at a faster rate than in outer London areas. We expect the rate of house price inflation for the London city index to continue to slow over 2017 towards 0%.
Regional cities overtake London
London is being overtaken by large regional cities such as Birmingham, Manchester and Liverpool where prices are rising off a lower base and where affordability levels remain in line with their long run average. Manchester is the fastest growing city outside southern England where prices are up 8.3% in the last year on an average price which is a third that of London
London prices up 85% since 2009
Slower growth in London is not surprising given house prices are 85% higher than they were in 2009 (figure 2). This growth is primarily a result of rising incomes and strong demand with buying power fuelled by record low mortgage rates.
Cambridge and Oxford have recorded strong price gains of >75% which have resulted in record high price to earnings ratios in these cities (see November 2016 report).
The contrast to cities outside southern England is stark with prices in Newcastle, Glasgow and Liverpool just 13%-16% higher than their post global financial crisis lows.
Material upside for house prices in regional cities
The question is how much further house prices in regional cities could have to run were house prices to fully ‘price in’ low mortgage rates and the impact of continued economic growth and rising incomes.
In our view there is material upside for house prices in the coming years in many cities where the recovery since 2009 has been limited. This is based on our analysis of previous housing cycles and the recent profile of the recovery in London. The beneficiaries will be cities where investment in employment, infrastructure and regeneration will help stimulate the local economy. The timing and scale of future house price growth will, of course, depend upon the outlook for jobs, incomes and mortgage rates.
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.
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.