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Uk city house price inflation is registering at +1.7%. Seven cities are registering house price growth of less than +1% per annum. There is also a growing polarisation in market conditions across southern England and the rest of the country. Whilst prices in London are still falling annually, quarterly growth has improved.
Seven cities with annual growth less than +1%
UK city house price growth is running at +1.7% as the rate of price inflation continues to slow. Seven cities are registering house price growth of less than +1% per annum – the first time we have seen this since June 2013. All these cities are in the south of England except for Aberdeen where price growth is -3.2% (Fig.1). Edinburgh (+5.1%) is registering the highest growth, followed by Liverpool (+4.9%) and Cardiff (+4.7%).
Growing polarisation in underlying market conditions
There is a growing polarisation in market conditions across southern England and the rest of the country (Fig 1). Bristol has the highest annual growth rate in southern England at +2.0%. The remaining six cities are all registering growth of between -0.3% and +0.8% as affordability constraints impact demand, resulting in a lower rate of house price inflation.
Weaker demand means sales are not keeping pace with the new supply of homes for sale. Increases in supply are compounding the downward pressure on prices in southern cities. The opposite is true elsewhere.
Sales fail to keep pace with new supply in south
Fig. 2 uses Zoopla listings data to plot the ratio of sales agreed to new supply in cities across southern and northern England. New supply has grown faster than sales in cities across southern England since 2016 - the start of the slowdown in price growth. Today there are 1.3 units of supply new to the market for every sale agreed. Before 2016 supply struggled to keep pace with sales with a ratio closer to 1 which created scarcity and a strong upward pressure on prices.
Market dynamics are stronger in northern cities
The dynamics in northern cities are different to the south of England with continued growth in sales eroding supply at an increasing rate, supporting above average price growth. While the trend in the ratio of sales to new supply has been downward over the last 5 years it has started to rise over 2019H1 as new supply comes to the market at a faster rate than sales.
Dynamics shift in coastal cities of southern England
Fig.3 tracks the sales to new supply ratio for selected cities. It reinforces how underlying market conditions have weakened in cities along the south coast of England where the ratio of sales to new supply is approaching the current ratio in London.
Signs of weaker conditions extending to Birmingham
Underlying market conditions in Birmingham appear to be changing with the ratio increasing over 2019Q2 as the growth in supply expands faster than sales. This suggests a weaker outlook for price growth in Birmingham where the rate of growth has slowed from a recent high of 7.2% in July 2017 to 4.0% today.
Stronger market conditions in northern cities
Manchester has not seen as sharp an increase in the ratio of sales to new supply as Birmingham although the ratio has shifted higher. This suggests continued above average price growth in Manchester. While not shown in Fig. 3, Liverpool has a sales to supply ratio of 1 and it is no surprise it has one of the fastest rates of growth as sales match new supply creating scarcity.
Signs of continued, modest improvement in London
London has led the slowdown in price inflation since 2016. In our view, the London market is coming to the end of a 3-year repricing process. There has been an improvement in the ratio of sales to new supply thanks to a small, but important, increase in sales agreed and less new supply. Prices are still falling across many parts of London on an annual basis, but the quarterly growth rate has improved. Prices are firming on the back of more realistic pricing of new supply which is much closer to what buyers are prepared to pay.
Fig. 3 – New supply to sales ratio selected cities
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.