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House price inflation continues to re-bound post-election with city level house price inflation is running at 8.7% per annum ahead of the UK rate. House price to earnings ratios are in line with long run averages across the majority of cities with the exception of London, Oxford and Cambridge. The upward momentum in house price is set to continue.
House price growth continues to accelerate
House price inflation continued to rebound post-election. In the three months to May 2015 city level house price growth averaged 1.4% per month (figure 1) - equivalent to an annualised rate of 17.7%.
The year on year rate of house price growth across UK cities is 8.7%, higher than 6.5% growth recorded across the UK. At a city level year on year growth ranges from 3.2% in Edinburgh to 12.3% in Oxford. The upward momentum in house prices is originating from a broad range of cities. The strongest levels of growth in the three months to May 2015 have been registered in Bristol (4.5%), Glasgow, Edinburgh and Belfast (4.2%) and Nottingham (3.9%).
The profile of growth across the 20 cities reflects the diverse nature of the housing market with a strong, demand-side, recovery in southern England yet to spread to other cities. Looking forward, the impetus for growth looks set to continue as a growing proportion of households feel the benefits of economic growth. The greatest risk is from an earlier than expected rise in interest rates as economic growth creates inflationary pressures.
Price to earnings ratios in line with long run average
Current house price to earnings ratios are broadly in line with the long run (12 year) average. Affordability levels are extended in Oxford, Cambridge and London at over 11.5x. The ratio is below average in nine cities with the lowest ratios in Glasgow and Liverpool.
Price to earnings ratios are in line with their long run average in most cities
Low mortgage rates not fully priced in
With average mortgage rates at 2.6%, compared to a 12 year average of 4.5%, there is further scope for low mortgage rates to be priced into house prices. The speed at which this happens will be a factor of local economic performance and incomes growth as well as the cost and availability of debt. Tougher mortgage affordability checks and above average deposit requirements will limit the speed at which low rates are priced into the market.
Affordability pressures will have to bite at some point in the high value, high growth markets. Double digit growth is being sustained by a lack of supply, below average transaction volumes and a third of sales funded by cash or buy to let mortgage. A transition in the localities registering higher growth within cities also plays a role in sustaining headline growth.
Impetus for house price growth shifts within cities
London has the highest price to earnings ratio but it covers a wide range of sub-markets. Over the last 3 years the impetus for house price growth has shifted from the high value, international, prime markets to the more affordable markets in outer London and the commuter belt.
Year on year growth is just 1.6% in Prime Central London (figure 3) where pre-election concerns over a proposed mansion tax together with other tax and currency changes have impacted demand. There is further growth to come from the outer areas of London but once this has fed into prices a period of below average growth appears inevitable.
City house price growth slows to 6.4%. Manchester fastest growing city as London slips to 10th in growth rankings. New analysis of city turnover reveals large increases and falls. Overall city turnover expected to be flat in 2017.
City level house price inflation is running at 6.9% while growth in London (6.4%) is running at its lowest level for 4 years and set to slow further. House prices in many regional cities where the recovery has been muted have material upside so long as the economy continues to grow and mortgage rates remain low.
House price inflation in Manchester hits 12 year high. Growth in regional cities continues to overhaul London which dropped to 7th in the city house price growth rankings for 2016. Bristol is still the fastest growing city +9.6% but could be overtaken by Manchester in Q1.
City level house price growth is running at 7.7%, in line with our projections this time last year. We expect city house price growth to slow to 4% in 2017 with weaker growth in London and other southern cities offset by sustained growth in large regional cities.