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City level house price growth rate is 6.4%, up from 4.9% at the end of last year. 2017Q1 saw city level house prices rise by 3.5%, the highest quarterly rate of price inflation for 3 years. House price inflation in London continues to slow and has now reached 4.9% yoy which means the capital is among the five slowest growing cities along with Oxford and Cambridge.
City house price growth 6.4%yoy
UK city house price growth is picking up momentum. House price growth in the first quarter of the year was 3.5%, the highest quarterly rate of growth for 3 years (Fig. 1). This has resulted in the annual growth rate increasing to 6.4%, up from 4.9% at the end of 2016 Q4 but still lower than 12 months ago (8.1%).
Growth at 12 year high in larger regional cities
The impetus for faster house price growth is emanating from large regional cities such as Newcastle, Glasgow and Edinburgh with Newcastle. These cities have registered above average price increases over the first quarter of 2017 (see Table 2). Manchester remains the fastest growing city covered by the index where the annual growth rate is 8.8% followed by Birmingham at 8.0%.
Attractive affordability levels, record low mortgage rates and an improving economic outlook are all supporting demand for housing. Together with limited availability of stock for sale this is creating scarcity and an upward pressure on house prices. Price rises are not running away but house price growth is well ahead of earnings growth.
Prices rises at 12 year high in some regional cities
Fig. 3 shows the ratio between new supply and sales agreed comparing London to Birmingham and Manchester. It highlights how the balance between new supply and sales remains ‘tight’ in Birmingham and Manchester while market conditions have weakened in London. In the case of Birmingham (8.0%), Manchester (8.8%) and Newcastle (5.6%), continued improvement in underlying market conditions has resulted in the annual rate price increases reaching levels not seen since early-2005.
Southern cities ex-growth
In contrast, house price growth in London, Oxford and Cambridge has slowed to less than 5% for the first time in five years as affordability pressures, and tax changes for investors, constrain demand. It is clear that in London sales are failing to keep pace with supply. Stock that is on the market will require downward price adjustments in order to sell.
Election impact and immediate outlook
Buyers outside the south of England appear to be shrugging off concerns over Brexit and a squeeze on real incomes to take advantage of low mortgage rates. The announcement of the General Election may create some short term uncertainty although comparing the profile of sales volumes between election years and non-election years there is no material difference.
Compared to the level of uncertainty over Brexit, it is debateable whether the election will really make a material difference to buyers’ decision in the next two months. In our view the current market trends appear well set for the rest of 2017 where above average growth in regional cities offsets weak, single digit increases in southern cities.
Fig. 3 - Ratio of new supply to sales agreed
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.
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.