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Weaker market conditions mean cities house price inflation has slowed to 1.7%. As affordability pressures grow, London's weak growth spreads across southern England. Sales volumes in southern cities are 13% lower than in 2015. Conversely, sales volumes are 19% higher than 2015 in regional cities. The cities registering the highest rate of growth at present are those where recovery in prices since 2008 has been weakest.
Price growth weakens across southern England
UK city house price inflation has slowed to 1.7%, the weakest growth since May 2012. Weaker market conditions are spreading out from London into cities across southern England as affordability pressures grow and moving costs increase.
All six cities covered by the index in southern England, outside London, are recording the lowest growth rates since 2012 – ranging from -0.6% in Oxford to +2.2% in Bristol (Fig.1).
Weaker demand as sales volumes fall 13% since 2015
Demand for housing in southern cities has weakened, evidenced by falling sales volumes, and this has resulted in lower levels of house price growth.
Our latest analysis of city level housing transactions shows sales volumes down by an average of 13% across southern cities since 2015. (Fig.2). Sales are down by 20% in Cambridge, in line with the decline in London, and by 12% to 13% in Portsmouth and Bournemouth.
High price growth eventually results in lower sales
Falling sales volumes after a prolonged period of high house price growth is part and parcel of the unfolding housing cycle. The reality is that the more house prices increase over time, the more buyers are priced out of the market through a mix of affordability factors and higher moving costs.
Figure 3 shows the relationship between price growth since 2008 and the change in sales since 2015. It shows cities with the greatest increase in house prices have registered a steeper decline in sales since 2015 - the year with the highest overall sales since 2007.
Above average price growth in affordable cities
The cities with the highest rates of price growth at present are those where the recovery in prices since 2008 has been weakest and where affordability levels remain most attractive. Liverpool currently has the highest annual rate of house price growth (5.8%) with three other cities registering price growth over 5% - Leicester, Glasgow and Manchester. Housing sales in Glasgow and Liverpool are, respectively, 12% and 19% higher than in 2015.
Coverage of price falls in London continues to decline
House prices in London are unchanged compared to 12 months ago. The decline in proportion of local markets registering annual price falls that we highlighted last month has continued into March. Greater realism over pricing after a 3-year period of falling sales means house price growth is currently stabilising.
Housing cycle continues to unfold
The housing cycle continues to unfold driven by market fundamentals and the backdrop of Brexit uncertainty. Over the last 20 years, falling mortgage rates have provided an ongoing boost to buying power but with rates bottoming out at 2% in 2016 this trend has run its course. In addition to lower mortgage rates, the growth in house prices since 2008 has been driven by rising levels of employment and income growth. These factors have played out at different speeds across cities. Prices in some cities also received an additional boost from investor and overseas demand.
Over the last 3 years we have seen tax changes for investors and tighter mortgage regulations for homeowners shifting the dynamics of affordability. Together with higher prices, this has impacted demand for housing and the rate of house price growth. Low single digit house price growth is the medium-term outlook once cities have adjusted to the changed fundamentals.Fig. 3 – Change in price from 2008 and sales from 2015
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.