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The divergence in house price growth between southern England and regional cities continues, with overall HPI at 5.2%. London growth remains slow at +1%.
City house price growth running at 5%
UK city house price inflation is running at 5%, up from 4% a year ago. Edinburgh is the fastest growing city (+7.7%) with Birmingham, Manchester, Leicester and Liverpool all growing by more than 6% per annum.
Prices falling in real terms across five cities
There are five cities where house prices are falling in real terms – Southampton, London, Oxford plus two where prices are falling in nominal terms – Cambridge (-1.1%) and Aberdeen (-6.6%).
Price growth since 2009 ranges from +6% to +86%
The level of house price inflation since the end of the downturn in 2009 varies widely. Fig. 2 shows that growth ranges from 6% in Aberdeen to 86% in London. Oxford and Cambridge have performed like extensions of London, while robust price growth in Bristol has resulted in a 70% increase since 2009.
There is a clear gap to the remaining cities, each of which have experienced varied growth. These differentials are explained by economic and demand side factors. A similar pattern of relative performance was seen mid-way through the last housing cycle.
Timing and scale of growth varies over time
Over housing cycles housing markets register different growth rates at different times. Fig.3 shows the variation in the timing and scale of house price growth since 2009. By the end of 2013, the strongest growth had been registered in London as overseas and domestic buyers boosted demand.
In contrast, most large regional cities outside southern England failed to record a 10% increase in prices by the end of 2013. Glasgow and Liverpool continued to register price falls at this time. Only in the last 2 years have large regional cities started to record above house price growth on improved consumer confidence, rising employment and attractive affordability metrics.
Will all cities grow as much as London?
Cities outside southern England have further room for house price growth. We do not expect growth to match the increase registered in London as the market dynamics are different e.g. high levels of overseas and investor buying. There are also questions over the sustainability of pricing in London where gross yields are sub 4.5% and affordability levels are at an all time high. We expect average house prices in London to drift lower in real terms in the coming 2-3 years with lower turnover (down 16% since 2014) creating scarcity.
How much further can prices rise in regional cities?
We expect house prices in regional cities such as Birmingham and Manchester to increase by 20% to 30%. This is based on our analysis of how the last housing cycle unfolded and adjusting for today’s policy environment. It assumes mortgage rates remain low by historic standards and the economy to continues to grow. At current growth rates this will take 3 to 4 years to feed through into house prices.Fig.3 – Cumulative house price growth from 2009
House price inflation is currently sitting at 3.2% annually, with growth ranging from +7.7% in Leicester to -2.8% in Aberdeen. Six cities are registering growth above 6%, while London prices are falling by -0.4%. The impact of Brexit on housing has so far been limited, our lead housing indicators suggest no imminent deterioration in the outlook for prices. However, uncertainty about Brexit has been a compounding factor in the slowdown of the London market, alongside weaker market fundamentals.
UK City house price is moderating at +3.2%. Two cities are registering annual price falls, while five cities are tracking house price inflation at more than twice the rate of earnings growth. In London, the extent of monthly price falls has moderated, and 56% of postcodes are registering month on month price gains.
The impact on the UK economy of a hard or ‘no deal’ Brexit, and the knock-on impact for the housing market, has been a topic of much debate recently. Despite uncertainty around Brexit compounding the market slowdown in London, our analysis of income to buy indicates there is further scope for price growth in the most affordable cities, where prices are currently rising fastest.
UK city HPI moderates to 4.2% year on year ranging from +7.5% to -4.0%. Nottingham and Leicester are the fastest growing cities, with London slipping into negative annual growth. Recovery since the financial crisis varies widely - three cities have prices below the levels a decade ago while four cities have prices >50% higher than in 2008.