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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
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.
UK City HPI is running at 2.3%, with Liverpool and Edinburgh seeing growth of +6% and Aberdeen -5%. Looking at average house price growth versus growth in average earnings, we can see that affordability levels are starting to improve. Twelve cities are registering price growth that is lower than the growth in average earnings.
HPI runs at +1.8% as the rate of price inflation continues to lose momentum. Price growth weakens across southern England, hitting high priced cities more than others. These higher prices have resulted in fewer buyers. The net result is weaker demand, lower price growth and, in some areas, price falls. The income to buy across the three most expensive cities has fallen 5% since 2016.