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City house price inflation is running at 5.3%. The sharp slowdown in London house price growth over the last year has reversed with an increase in the annual rate over the last month rising from 2.3% to 2.8%.
City house price growth 5.3% yoy
The UK City house price inflation is running at 5.3% compared to 7.4% in July 2016. The rate of growth has picked up in recent months thanks to above average growth in large regional cities and an increase in the annual rate of growth in the London City index.
Birmingham is the fastest growing city (8.0%, up from 6.8% in July 2016). The rate of growth has been consistent over the last year and trending upwards on sustained demand, a lack of homes for sale and attractive affordability. Manchester (7.1%) and Nottingham (6.9%) are the second and third fastest growing cities.
Aberdeen continues to register year on year price falls (-3.0%). House prices in Aberdeen have been registering negative annual growth for exactly 2 years. Average house prices are 16% lower since December 2014 as the fall in oil prices impacted the economy.
London City house price growth ‘bottoms out’
The annual rate of growth in London has increased to 2.8% marking an end to the steep slowdown over the last 18 months. Figure 2 shows the annual and 3 month growth rate for London City. It shows how prices were unchanged over 2016H2 in the wake of the Brexit vote, while over the last 5 months the index has recorded positive growth, albeit at a relatively low level.
This stabilisation in the rate of London City house price growth is down to two main factors; 1) lower transaction volumes and 2) an absence of forced sellers. Housing turnover across London has fallen by 17% since 2015 as affordability pressures and recent policy changes impact demand. In the absence of a jump in borrowing costs, or other adverse economic factors, sellers are slow to accept downward adjustments in prices in the face of weaker, price sensitive demand.
The gap between asking and achieved prices is a measure of how much downward pressure there is on values. Figure 3 shows the percentage of the asking price achieved over the last 3 years. It shows that the pressure on prices is greatest in the most expensive parts of London where demand has been weaker since the end of 2014. These inner London markets are registering small year on year price falls of up to -2%. The downward pricing pressure is less evident in the lowest value markets of London which have registered above average growth and price inflation of over 3%.
Pricing re-alignment still has room to run
This analysis of the gap between asking and achieved prices only captures those homes where the seller and buyer strike a mutually agreeable price. The reality is that there are homes for sale in London where levels of demand are low and/or pricing is out of line with what buyers are prepared to pay. Figure 4 in the downloadable report shows the ratio between the supply of homes for sale and sales agreed each month for London City. A ratio of 1 shows new supply matching sales and price rises, a ratio below 1 shows sales running faster than supply which creates stronger upward price pressure.
Since mid-2016 this ratio in London has increased to around 1.4 as sales rates have dropped back and available supply has grown. This is consistent with weaker house price growth. More availability of supply relative to sales suggests there is further to run on the re-adjustment of prices.
Prospects for the remainder of 2017
There remains a clear divide between the prospects for house price growth in regional cities, where affordability levels are attractive, and the prospects for house price growth in London and other high value cities in southern England. We expect house price growth in regional cities to be sustained at current levels for the rest of 2017. London is set for a sustained period of low nominal house price growth and lower sales volumes.Fig. 3 - Achieved price as a % asking price
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 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%.
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.