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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
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.