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City level house price inflation is running at 8.4% per annum. Growth in the first half of 2015 was 6.3% and looks set to exceed 10% over 2015 as the recovery in house price spreads. Rising interest rates pose the greatest risk to the market with small increases likely to cool demand and reduce the rate of growth.
House price growth continues to accelerate
Annual house price inflation across the Hometrack UK Cities House Price Index is running at 8.4%. While the annual rate of growth has moderated slightly over the last six months, the 3 month rate of growth has been accelerating as low mortgage rates and improving economic outlook support demand.
House price inflation at a city level ranges from 11.6% in Cambridge to 2.9% in Liverpool. Oxford and Cambridge continue to perform like extensions of the London market with all cities having a very similar profile of house price growth over the last 8 years – figure 1 – and double-digit price-earnings ratios as shown in the May 2015 Cities Index report.
Table 1 - 20 UK city index summary, June 2015
Across the larger cities of northern England house price growth continues to increase off a low base. The so-called ‘northern powerhouse’ cities of Leeds, Manchester, Newcastle, Liverpool and Sheffield have all registered a pick-up in growth since 2013 but with average prices still below 2007 levels (figure 2).
The fastest growing cities in 2015 H1 have been Oxford 8%), London (6.6%) and Glasgow (6.4%). The weakest growth has been registered in Aberdeen where average prices have been flat.
City level inflation to reach 10% over 2015
City level inflation to reach 10% over 2015
Looking to the second half of the year we expect the headline rate of growth across the 20 cities index to gain further momentum towards 10% year on year as households continue to price low mortgage rates into the market on the back of rising demand, low turnover of stock and prices rising off a low base in regional cities. This trend has largely run its course in inner London where growth has slowed dramatically and we expect this to shift into outer London. Across other cities the pick-up in house price inflation will be welcome news for existing mortgagees as lower loan to values will create headroom to re-mortgage onto better rates.
Higher interest rates will slow growth
The greatest risk on the horizon remains an increase in interest rates, recently highlighted by the Governor of the Bank of England. While a year’s worth of new buyers have been subject to tougher affordability tests the majority of mortgagees have not. Over half (57%) of mortgage balances are on variable rates. While this is down from a high of 73% small stepped increases in mortgage rates are likely to impact market sentiment, slow demand and lead to a slowdown in the rate of house price growth.
City level house price growth is holding steady at 8.4%. This month we reveal an updated view on city level affordability. This finds that after an 86% uplift in house prices since 2009, the price to earnings ratio in London now sits above 14x with Oxford and Cambridge close behind. Other cities are at or below their long run average. Read the Report to find out what this means for city level house price inflation.
City level house price growth is running at 8.5% but growth in London has slowed rapidly in the last quarter to the lowest level of quarterly growth for 20 months. Eleven cities are registering higher growth than at the start of 2016 while 9 are slowing.
The pace of city level house price inflation is slowing with growth in the year to August 2016 running at 8.2%. The 20 city index recorded its lowest level of quarterly growth (1.9%) for 6 months as a seasonal lull in market activity and weaker demand post Brexit and the March Stamp Duty change reduce the upward momentum of house price growth
The annual rate of house price inflation across the 20 cities has started to slow after 12 successive months of rising house price inflation A marked slowdown in the rate of growth over the last three months in London is behind the shift in momentum. However, house price growth in large regional cities outside southern England, continues to hold steady at 7-8% per annum with no sign of an imminent slowdown. Aberdeen is also registering a slower rate of price falls compared to recent months.