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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.
City house price growth moderates to 4.2%
The annual rate of UK city house price inflation has moderated to 4.2%, in line with the average growth rate over the last 2 years (Fig.1). Flat prices in London and a slower growth across large regional cities are weighing on the headline rate. Weaker market sentiment and affordability pressures in southern England are limiting the willingness of buyers to bid up the cost of housing.
Nottingham the fastest growing city
Nottingham and Leicester are currently registering the fastest growth of 7.5% and 6.6% as prices increase off a low base. Birmingham and Manchester have dropped out of the top 3 fastest growing cities, although the rate of growth at 5.7% and 6.1% respectively is still above average.
London slips into negative annual growth
The annual rate of price inflation across London has slipped into negative territory (-0.1%), although prices are 1.2% higher over the last quarter, continuing the trend over recent months for small month on month price gains on greatly reduced volumes.
Recovery since the financial crisis varies widely
It is 10-years since the financial crisis. 2008 was a year when house prices posted their fastest rate of price falls and prices continued to fall for a further 1-4 years depending on each city. Figures 3 and 4 plot the average price for housing in July 2008 and July 2018. The analysis highlights the very wide range in growth over the last decade.
Five cities are below or within 5% of the level of prices in 2008. Four cities have prices more than 50% higher than in 2008 while the remaining eleven cities have prices that are 11% to 36% higher than a decade ago.
Five cities still below or within 5% of 2008 prices
Three cities have average prices that are still below their 2008 levels – Belfast (28%), Aberdeen (3%) and Liverpool (1%). Two other cities, Glasgow and Newcastle have average prices that are within 5% of where prices were a decade ago.
2008 did not mark the end of price falls in these cities and average values continued to fall for a further 3 to 4 years. The subsequent recovery phase has been shorter and with below average rates of house price growth compared to other cities, reflecting weaker underlying demand for housing.
Four cities register prices 50% above 2008 levels
At the other end of the spectrum, prices in Cambridge are 70% higher than in 2008 followed by London (65%), Oxford (55%) and Bristol (53%). Stronger economic growth, a broader base of demand for housing and limited availability of homes for sale are behind this stronger performance. However, these cities are now registering some of the weakest levels of growth as a result of low yields and stretched affordability.
Strongest current performers in mid-segment
The cities currently registering above average growth, and with further upside for house prices, are to be found in the middle performing segment where prices are 11% to 36% higher than 2008 levels. House prices in these markets remain relatively affordable and have not fully priced in low mortgage rates.
What might the picture look like in 2028?
We do not create 10-year forecasts but given our insight into how housing cycles have unfolded in the past we would expect the underperforming cities to have closed much of the gap to the top performers in terms of percentage price change from 2008.
The timing and scale of this process will rely on economic growth and job creation in these cities and the trajectory of mortgage rates. Average prices in the highest value cities are set to remain, at best, largely static for the foreseeable future as affordability pressures unwind through a drawn-out period of low real house price falls and underlying growth in household incomes.
Fig. 3 – City house prices in Jul-08 and Jul-18
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.