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City house price growth is proving resilient with average prices up 5% in 2017H1. Birmingham is the fastest growing city while 4 low growth cities are registering house price falls in real terms.
City house price growth 5.1%yoy
UK city house price growth is running at 5.1% per annum, down from 8.8% in June 2016. House price inflation has picked up in recent months. Growth in the first half of 2017 ranges from 0.2% in Aberdeen to 6.1% in Birmingham (Table 2). This is consistent with an 11% increase in home purchase mortgages which are also 5% higher than the 5 year average.
Thirteen cities with lower annual growth
Thirteen cities have a lower annual growth rate than a year ago (figure 1). London, Bristol and Oxford have recorded the greatest slowdown as affordability and uncertainty impact demand. The rate of price falls in Aberdeen has slowed sharply.
House price growth is higher in seven cities, but the scale of the increases compared to June 2016 are more modest. The exception is Edinburgh where the rate of growth has bounced back from 1.8% a year ago to 6.5% today.
Prospects for 2017H2
Despite a material slowdown in the rate of house price growth in south eastern England, house price inflation is holding up despite the squeeze on real incomes and uncertainty around Brexit. The Brexit impact was greatest over 2016H2 and house price inflation has picked up over the last 6 months.
At the end of 2016 we predicted that city house price growth over 2017 would be 4%. On current trends we expect this to be closer to 6-7%. There remains material upside for house prices outside south eastern England. The outlook for mortgage rates, employment and economic growth that hold to key to how fast this translates into higher house prices over the next 2-3 years.
Negative real house price growth
Nominal house price growth in four cities is failing to keep pace with the rate of consumer price inflation which is 2.6% - Cambridge (1.9%), Oxford (2.1%), Newcastle (2.4%) and Aberdeen (-2.7%). House price growth across London City has fallen to a 5 year low of 2.6% meaning prices are flat in real terms. Inner London markets have the lowest rates of house price growth and are registering real price falls.
16 cities have average prices above 2007 peak
Sustained house price growth in large regional cities has pushed house prices ahead of their 2007 peak in sixteen cities. At current growth rates it will be another 2 years before Newcastle, Glasgow and Liverpool exceed their 2007 levels. Belfast will take much longer with prices still 45% lower than in 2007.Fig. 3 - City house prices relative to 2007 peak
There has been continued growth in large regional cities, despite house price inflation slowing to 5.4%. ZPG listings data shows discounts to asking prices are narrowing, indicating market conditions are improving across cities outside south eastern England. Increased discounting can be seen in London, where price growth has slowed to +1.8%.
City house price inflation has increased to 6.3%. The fastest growth is being registered in cities which have recorded the weakest growth since 2009. We expect city house prices to increase by 5% in 2018.
City house price inflation is 6.1% as price growth picks up speed, driven by regional cities where affordability levels, measured on a price to earnings basis, are in line with the 15-year average. In London affordability is at an all-time high of 14.5x earnings.
City house price inflation is running at 4.9%. Edinburgh is the fastest growing city, overtaking Manchester. House price inflation across London City is 2.3% although low growth means 85% of markets are registering price falls in real terms. We consider the outlook and the impact of a possible increase in interest rates.