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City house price growth is slower than a year ago but average prices increased 3.5% in last 3 months. There is material upside for house prices outside southern England. In London the rate of growth has dropped from 13% to 3% in the last 12 months.
City house price growth 5.1%yoy
UK city house price growth is 5.1% per annum, down from 8.8% in May 2016. Half of cities have faster growth than a year ago (Table 2). Cities in south eastern England have recorded the greatest slowdown over the year – London 13% to 3%, Cambridge 13% to 2%.
Fastest increase over a quarter for 3 years
While the annual rate of growth is at 5.1%, the index has recorded an acceleration in growth over the last 3 months with average prices across the 20 city index up by 3.5%. This is the highest quarterly rate of growth for 3 years, since June 2014 (Fig. 1).
All cities, with the exception of Oxford and Aberdeen, have registered higher prices in the last 3 months. Large regional cities recorded the highest price increases over the last quarter - Birmingham (3.8%), Nottingham (3.8%), Manchester (3.3%) and Newcastle (3.5%). House prices in these and other cities continue to rise off a low base supported by a lack of housing for sale and low mortgage rates.
More growth to come in cities outside South East
We believe there is the potential for material upside in house prices outside Southern England. Price increases since 2009 range between +85% in London to just +12% in Glasgow (Fig. 2). Regional cities are unlikely to post London levels of growth, but we expect the gap in growth from 2009 to close. Cities with growing economies creating jobs have the greatest upside. Birmingham (7.7%) and Manchester (6.8%) are examples of cities with sustained, above average price growth. A negative economic impact from the Brexit negotiations, or an upward shift in mortgage rates remain the key risks.
Rapid price deceleration in London bottoming out
In contrast, the London housing market has registered 90% growth since 2009. Affordability and uncertainty are impacting demand. London has the lowest annual growth (+3.3%) for 5 years. However, the rapid deceleration in price inflation is showing signs of bottoming out.
On current trends we do not expect to see the London City index to slip into negative year on year growth during 2017. We predict annual growth to end the year at 2-3%. The challenge for business operating in London is lower turnover, which is the market response to weaker demand.
Some sub-markets within London City, which covers 46 local authority areas, are registering annual price falls. Figure 3 plots year on year growth by local authority against average prices. Subscribers to our email alerts can see the full data for London City.
Price inflation is 4-6% in the lowest value areas, down from 15% to 18% a year ago. Price rises are lowest in the highest value markets, where growth has been in single digits for the last year. Sub-markets with prices between £600,000 and £800,000 are where small annual price falls are currently concentrated e.g. Islington, Hammersmith.Fig. 3 - House price trends within London City
There has been continued growth in large regional cities, despite house price inflation slowing to 5.4%. ZPG listings data shows discounts to asking prices are narrowing, indicating market conditions are improving across cities outside south eastern England. Increased discounting can be seen in London, where price growth has slowed to +1.8%.
City house price inflation has increased to 6.3%. The fastest growth is being registered in cities which have recorded the weakest growth since 2009. We expect city house prices to increase by 5% in 2018.
City house price inflation is 6.1% as price growth picks up speed, driven by regional cities where affordability levels, measured on a price to earnings basis, are in line with the 15-year average. In London affordability is at an all-time high of 14.5x earnings.
City house price inflation is running at 4.9%. Edinburgh is the fastest growing city, overtaking Manchester. House price inflation across London City is 2.3% although low growth means 85% of markets are registering price falls in real terms. We consider the outlook and the impact of a possible increase in interest rates.