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House price inflation across UK cities is holding up better than expected at the end of the first quarter of 2015. Average house prices across the 20 cities composite index registered growth of 3.8% in Q1, compared to 3.0% over the same period in 2014.
The annual rate of growth across the 20 city composite index was 10.1% in the year to March compared to 7.3% for the UK as a whole. At a city level the annual rate of growth ranges from 3.5% in Liverpool to 13.8% in Oxford.
While house price growth in London and other high growth cities continues to slow off a high base, the ongoing recovery in house prices across the larger regional cities outside southern England is supporting the headline rate of growth. Record low mortgage rates continue to be priced into the housing market as the benefits of economic recovery spread.
As we reported last month, a 20% to 30% uplift in turnover over 2014 has provided momentum to house prices in the larger cities outside the south east of England. There are ten cities where the average monthly rate of house price growth has increased in the last quarter compared to the previous 12 months (Figure 1).
The strongest pick-up in house price growth has been registered in Glasgow, Oxford, Leeds, Liverpool, Manchester, Newcastle and Sheffield. Together these larger cities outside the south east account for 30% of the housing stock covered by the index.
At the other end of the price growth spectrum, house price inflation in Q1 has weakened in Aberdeen and Cambridge where prices are well above their 2007 levels. The fall in the oil price is likely to be impacting the market in Aberdeen while in Cambridge high house prices and significant growth in new housing supply are likely to be impacting the rate of growth – in contrast to Oxford where low levels of new housing supply continue to underpin price growth.
Figure 2 shows the performance in house prices since 2007 across the large regional cities compared to the UK average. The recovery in these areas took hold from early 2013 and since then prices have been on a steady upward trend. In all cases average prices are still below 2007 levels but have grown 8% to 13% from their recent lows compared to 59% in London.
House prices in regional cities outperform Central London for first time since 2005
The impetus for growth in these cities is coming from higher value markets with lower loan to values where households in the higher socio economic groups are feeling the benefits of the economic recovery and are using low mortgage rates to support higher levels of market activity.
This is the same pattern seen in London between 2011 and 2013. However, the majority of demand for housing in these cities is coming from domestic owner occupiers. Demand for housing is not being boosted by international or excess investor demand, as was the case in London, hence the more modest level of price rises compared to recent growth rates in London.
Figure 3 plots the annual and monthly rate of growth across London City. The year on year rate has slowed from a recent high of 18.6% in July 2014 to 11.8% in March 2015. Over the last quarter prices have grown by an average 1.1% per month, - a third lower than the 1.6% per month over the first quarter of 2014.
The London City index covers the wider, travel to work area for London encompassing the key commuter areas around the administrative boundary of London. The London City index covers 46 local authority areas compared to the 33 London Boroughs that make up the administrative region of London.Fig. 3 - Annual and monthly growth rate across London City
Drilling down into Hometrack’s more localised house price indices reveals that the impetus for price growth in London has shifted from the international, high value central London markets, to the lower value and relatively more affordable outer London markets. Figure 4 plots the current year on year rate of growth against the average house price for the 46 local authorities covering the same areas as the London City index. There is a clear inverse relationship between average price and the rate of growth.
The highest year on year growth rate is currently being recorded in Newham and in Barking & Dagenham where average house prices are £275,000 and £215,000 respectively – 33% and 50% below the London average (£417,000). Watford Borough is the fastest rising market outside the London administrative area with growth of 11.6% and an average price of £308,000.
High capital growth rates in recent years have pushed down average loan to values in London, creating capacity for additional borrowing for households that can pass tighter affordability tests for new lending.
At the higher end of the pricing spectrum, the high levels of growth since 2009 have priced an increasing number of buyers out of the market; Kensington & Chelsea and Hammersmith & Fulham have seen prices rise by over 80% since 2009. Tax changes for overseas buyers and expectations over the proposed mansion tax are weighing on the upper end of the London property market where prices are registering small falls at a more localised level.
Fig. 4 – Profile of price growth within London City
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.