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This month's Cities Index is the second in a row to record a 3.9% increase year-on-year. This is taking average prices up to a nearly 3-year high. Prices have now also recovered across all English cities to pre-recession 2007 levels. Supply is still flat and outpaced by demand, at 2.6%.
UK city house price inflation approaches 3-year high
UK city house price growth remains at +3.9%, approaching a 3-year high. Last month we reported a strong bounce in demand. This has been reflected in the latest data for mortgage approvals (December 2019), which are up 5% compared to a year earlier.
The increase in the headline rate of growth is down to a pick-up in growth across cities, especially those in southern England where pricing was broadly flat over 2019 (Fig.1). All cities, except for Aberdeen, are recording annual house price inflation in excess of 2% per annum.
Growth in supply fails to keep pace with demand
The supply of new homes coming to the market for sale has recorded the usual seasonal uplift. Increased buyer demand will naturally bring more homes to the market.
However, the total stock of homes available to buy across UK cities is just 2.6% higher than this time last year. Across nine cities the stock of homes for sale is lower than a year ago by as much as 6% (Fig 2).
Nine cities have lower supply than a year ago
Cities where available supply is flat or shrinking are typically recording higher rates of house price growth. Three cities are registering annual price growth in excess of five percent - Edinburgh (5.9%), Nottingham (5.4%) and Leicester (5.3%). The first two have fewer homes for sale than a year ago – Leicester (-6%) and Edinburgh (-2%).
Strong demand and growing sales are eroding available supply at a faster rate than it is being replenished. This is exacerbated where demand from first time buyers is high as this group do not have property to sell.
Eleven cities have more homes for sale than this time last year. Strong demand and attractive affordability mean above average price growth can be sustained in cities such as Nottingham, Liverpool and Manchester.
Greater supply in Oxford and Cambridge is more likely a result of sellers, who were sitting on their hands waiting for market conditions to improve, deciding to make their move, encouraged by improving sentiment.
Supply/demand imbalance to last over 2020H1
We expect the imbalance in supply and demand to remain over the first half of 2020, supporting the upward pressure on prices.
We do not expect a material acceleration in the rate of growth as affordability pressures will limit the scale of price growth, especially across southern England
All English cities finally return to 2007 peak levels
Our city focused view on housing reveals how markets have seen prices develop at different speeds over the housing cycle.
It has been 12 years since the global financial crisis saw a contraction in mortgage credit, lower housing demand and house price falls. It has taken until the end of 2019 for all English cities to finally return to their 2007 price levels in nominal terms.
Newcastle has been the last to achieve this milestone 12 years on from the peak of the market in October 2007. Figure 3 shows the number of years it took for house prices in each city to return to their previous high.
Southern cities reach 2007 levels within 7 years
Southern cities led the way and returned to 2007 levels within seven years, boosted by rising demand and employment growth. Smaller cities such as Oxford and Cambridge reached this benchmark before London which covers a much larger area.
Central London prices rebound within 3 years
We have added in data from our Central London price index which shows it took just 2.5 years for prices to rebound – this rapid turnaround was a result of overseas buyers entering the market attracted by a major drop in the value of sterling which made housing look better value cheaper to dollar backed purchasers.
Regional cities return to peak in 8-10 years
It took another 2 years for momentum to build in house prices across large regional cities in the midlands and north which passed their pre-crisis high 8-10 years after in 2015/16.
One city, Belfast, remains well below (-38%) 2007 levels when prices were unsustainably high and represent something of a false benchmark. Pricing in Belfast is far more sustainable today and affordability is attractive, and the rate of price inflation is in line with the headline rate.
Aberdeen prices exceeded the 2007 peak in 2013, but subsequent price falls have taken them back below this level.
Prices growth since 2007 varies widely
The longer markets have recorded a recovery in prices the higher values are above their pre-crisis levels (download the full report to see figure 4 and table 2). Prices in London, Oxford and Cambridge are more than 50% higher than where they were in 2007 and have largely stalled at this level over the last 3 years.
Large regional cities are around 20-30% higher than pre-crisis levels while Newcastle and Liverpool are just 1% above.
We expect city level house price growth to remain in line with current levels. There is a danger that, in areas where market conditions have been weak over recent years, would-be sellers, reading the headlines of a bounce in demand and a firming in prices, may get ahead of themselves and become unrealistic on pricing. This would impact sales rates and sales volumes.
It is most likely to be an issue in London and other cities in southern England where changes in demand can feed quickly and disproportionately into prices. While demand has increased, buyers will remain sensitive to pricing levels in markets where affordability levels remain stretched.Fig. 3: Years to return to peak 2007 price level
UK city house price growth in February 2020 was +1.6%, higher than the +1.2% a year ago. That said, in recent weeks coronavirus has had a rapid impact on housing demand, which is 40% lower in the last week. Transaction volumes are set to decline by an estimated 60% in the next quarter with a further fall in sales volumes over Q3 2020.
This month’s Cities Index shows a continuation of the strong end to 2019. City house price growth is at a two-year high, at 3.9%. Coupled with a bounce in demand, which at 26% far exceeds the traditional new year boost, we see green shoots of returning market optimism. At a regional level, affordability of local stock is driving growth forecasts for Northern and Midlands cities, while in the South, the picture is more subdued.
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.