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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.
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.
HPI is currently running at +2.4%, half the average growth over the last five years, and below average earnings growth. Time to sell has hit a 3 year high, while discount to asking price has widened across UK cities. Despite this, underlying market conditions still vary widely across large areas of the country.
With HPI moderating at 1.9%, it appears the slowdown in house price growth is an indication of a return to a more sustainable pace of price growth. However, a change in buyer mix from cash buyers to those with mortgages, plus wide variance in the recovery of house prices is sending mixed signals about current housing market activity.