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The latest Hometrack UK Cities House Price Index reveals that city level house price inflation over the first three months of 2016 reached 4.2%, the highest rate of quarterly growth for 12 years as the normal seasonal increase in demand was boosted by demand from investors ahead of changes to stamp duty.
Table 1- UK 20 city index summary, March 2016
Source: Hometrack House Price Indices
Highest quarterly growth for 12 years
City level house price inflation over the first three months of 2016 reached 4.2%, the highest rate of quarterly growth for 12 years as the normal seasonal increase in demand was boosted by demand from investors ahead of changes to stamp duty. The year on growth for the 20 city house price index is running at 10.8%, ahead of 8.7% across the UK.
In the recent past, periods of accelerating house price growth have coincided with changes in market sentiment and demand – such as the introduction of Help to Buy in 2013 and after the 2015 General Election (fig. 1).
Liverpool records fastest growth in 2016Q1
The highest increase in house prices in the last quarter was recorded in Liverpool as prices rise off a low base, closing the gap to other major cities such as Manchester and Leeds where house price growth is running at over 7% per annum - the highest year on year growth since 2007.
Investors ‘searching for yield’
The acceleration in growth in the last quarter has, in part, been down to stronger demand from investors, especially those searching for higher yielding property. Tougher lending criteria for buy to let investors and changes to tax relief on mortgage interest payments are likely to push investors to search for higher yielding property which means more focus of investor demand in lower value cities, with lower buying costs, and further support for house price growth.Fig. 3 – Gross yields by city (2016Q1)
Focus on EU vote after stamp duty rush
With the rush to beat the stamp duty deadline now over, the question is how weaker investor demand will impact house price inflation in the second quarter of 2016. This at a time when home buyers start to consider the implications of the EU referendum for the economy and mortgage rates.
We believe house prices will continue to rise but a moderation in investor demand and greater caution in the run up to the EU vote will limit further acceleration in house prices. We expect the rate of house price growth to slow more rapidly in high value, low yielding cities such as London where house prices will be more responsive to weaker investor demand.
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.
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.