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May 2016 - House price boost in regional cities, with Brexit impact uncertain

On 28 June, 2016
  • The recent surge of investor buyers has boosted house price growth in regional cities. Liverpool has seen the highest growth in the last quarter and Bristol has the fastest annual growth rate.
  • The referendum result will impact turnover far more than house prices in near term although we expect a rapid deceleration of house price growth across all cities in 2016H2.
  • The city level impact is hard to gauge but we expect the immediate impact to be felt in London where affordability levels are stretched and the market was already facing headwinds.

A pattern of stronger growth in regional cities is emerging with highest growth rates in the last quarter coming from Liverpool (5.4%), Bristol (4.2%), Manchester (3.9%) and Leeds (3.7%). The question now is how the referendum result will impact the near to medium outlook.

City house price growth running in double digits
The rate of city level house price inflation continued to increase in May building on a strong first quarter and the surge of investor demand ahead of the stamp duty deadline. Year on year growth is running at 11.2% compared to 6.2% twelve months ago.

Table 1- UK 20 city index summary, May 2016

Source: Hometrack House Price Indices


City level house price inflation ranges from 14.1% in Bristol to 3.2% in Belfast and -9.6% in Aberdeen, where the downturn in the oil price is impacting on the economy and demand for housing. Bristol is now the fastest growing city – the first time a city outside the south east of England has grown faster than London since January 2010.

A pattern of stronger growth in regional cities is emerging with highest growth rates in the last quarter coming from Liverpool (5.4%), Bristol (4.2%), Manchester (3.9%) and Leeds (3.7%). The question now is how the referendum result will impact the near to medium outlook.

City level summary, May 2016
Source: Hometrack House Price Indices

Referendum impact – transactions
The immediate and short term impact of the EU referendum result will be widespread uncertainty amongst buyers and sellers across the housing market. This is against a backdrop of already subdued turnover – while sales volumes have recovered from their 2009 lows, sales as a percentage of stock remain low by historic standards at around 5%, or a move every 20 years.

Last month’s report analysed how external shocks have impacted housing turnover over the last 20 years. Shocks that impact the UK economy through lower spending and incomes growth have had the greatest impact on turnover. Aside from the 2008/9 downturn, when sales fell almost 50% off a high base, the previous economically driven fall in sales was in 2005 when volumes contracted 15% (fig.3). There was also a small contraction in turnover in 2015 and further sizable decline in housing market turnover now seems inevitable over 2016H2 on widespread uncertainty.

Fig. 1 – House price inflation across selected cities


Source: Hometrack Indices


Referendum impact – house price growth
This drop in turnover is set to be accompanied by a rapid deceleration in house price growth as buyers adopt a wait and see approach to assess the short term impact on financial markets, the economy at large and the outlook for personal finances. At present we do not expect house price falls, the greatest impact will be on market activity.
House price falls would require forced sellers, driven by higher mortgage rates and/or rising unemployment. While short-term turmoil in financial markets will impact market sentiment, it is too early to say how the vote to leave will impact the real economy. Tighter lending criteria implemented in recent years will help to mitigate the impact on the more recent entrants to the market.


Fig. 2 – Scottish city indices
Source: Hometrack House Price Indices
Fig. 3 – Long run change in city level sales volumes
Source: Hometrack House Price Indices

In addition, levels of new housing are likely to be scaled back helping to tighten supply and support prices. Builders had already been slowing starts ahead of the vote and on concerns over the Starter Homes initiative. This cautionary approach is unlikely to change until the outlook for demand improves.

The impact of the result on the outlook for individual UK cities is hard to gauge. Different cities are at different points in the housing cycle as shown in figure 4 which plots prices today relative to the 2007 peak against year on year growth. The size of the bubble reflects the average price of a home.

The relative position of each city reflects the strength of the local economy and the scale of demand for housing. All cities started in the bottom left in 2009 and have tracked to the top right of the chart. It shows that large regional cities outside southern England are still in the early to middle stages of recovery compared to the high growth cities of southern England.

The localised impacts on demand for housing are likely to be driven by the outlook for the local economy and jobs, as seen in Aberdeen over the last year with prices down 10% on a weaker oil price.

Fig. 4 – Relative position of city house prices
Fig. 4 – Relative position of city house prices
Source: Hometrack

The view for London
This analysis supports our view that the decision to leave the EU will be most keenly felt in the London housing market which is already facing headwinds. House price growth in the capital varies between double digit growth in lower value areas and weaker, low single digit growth in central London areas. Modest single digit price falls now appear likely in higher value markets as prices adjust in the face of lower sales activity and weaker investor demand. These markets have seen some of the highest growth in the last 5 years of up to 90% so a modest correction can be accommodated. Even a sharp, prolonged fall in the Sterling is unlikely to attract overseas buyers in the near term. Across the whole London market, where house price growth is running at 13%, we expect the rate of growth to slow rapidly in the short term on uncertainty and affordability factors.

Housing market fundamentals remain strong
Standing back from the immediate turmoil in financial markets, the reality is that the fundamentals of the housing market remain unchanged with record low mortgage rates and a wide imbalance between supply and demand. The UK doesn’t have a problem with housing demand, the more important question is how many buyers and sellers feel confident to participate in the market in the near term.

The sooner a clear picture emerges over the likely impact on the economy and the outlook for jobs and mortgage rates the sooner transaction volumes should stabilise and more buyers return to the market. Sentiment can turn fast and many businesses will hope the uncertainty does not linger and households start to put the result behind them and return towards business as usual.

May 2016 - House price boost in regional cities, with Brexit impact uncertain
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