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House price inflation is at 4.6% year on year, with prices falling across 20 local authorities in London. The gap between London and other cities is set to narrow, mirroring the trend over 2002-2005.
City house price growth running at 4.6%
UK city house price inflation was +4.6% over the last 12 months. House price growth across the twenty cities ranges from 7.1% to -5.7% (Fig.1).
Edinburgh and Manchester continue to register the highest rates of growth at 7.1% and 7.0%, respectively. House prices are falling in real terms across five cities – Belfast, Oxford, London, Cambridge and Aberdeen.
Prices falling across 20 local authorities in London
House price growth across the London City index is now 0.4% over the last 12 months. Prices are falling in nominal terms by up to -3.2% across almost half of the 46 local authority areas covered by the index.
Gap between London and other cities to narrow
With house prices in regional cities rising faster than London, the gap between London and the rest is narrowing. Figure 2 shows the ‘price relative’ between London and selected other cities (this is simply the ratio of the city to London as the base at 100%). It shows how, over the housing cycle, the price relative between London and other cities expands and contracts.
Price relatives reflect different drivers over time
Across all cities, the price relative ranges from 90% to 24% (Table 2). The size of the price relative between London and other cities reflects variations in the timing and levels of economic growth, incomes, job creation, available supply and the flows of net new investment.
Price relative set to narrow in regional cities
Over the next 12-24 months we expect the gap between London and other cities to narrow further, mirroring the trend over 2002-2005. Back then, London house price growth was weak after a period of out-performance from 1996-2000. In contrast, regional housing markets had under-performed and only started to register strong growth from 2001 onwards, which closed the gap to London.
How much can the house price relative close?
Figure 3 shows the level of house price growth required to return the price relative to one of two benchmarks – 1) the long run average and 2) the ‘high’ registered between 2002 and 2005. In cities that have registered strong house price growth, such as Bristol and Cambridge, the gap to the long run average is less than 5%. However, house price growth of 20% to 25% would be required to return the relative to the previous high in Cardiff, Edinburgh, Liverpool and Leeds.
Price falls in London can also reduce the gap
It is important to note that the narrowing of the price gap is not just about house prices rising in regional cities but prices in London falling in nominal terms. On balance we see the narrowing in the price relative being driven by price growth in regional cities but the weakness of price growth in London will support the overall trend over the medium term.Fig. 3 – Growth to return price relative to benchmark
House price inflation is currently sitting at 3.2% annually, with growth ranging from +7.7% in Leicester to -2.8% in Aberdeen. Six cities are registering growth above 6%, while London prices are falling by -0.4%. The impact of Brexit on housing has so far been limited, our lead housing indicators suggest no imminent deterioration in the outlook for prices. However, uncertainty about Brexit has been a compounding factor in the slowdown of the London market, alongside weaker market fundamentals.
UK City house price is moderating at +3.2%. Two cities are registering annual price falls, while five cities are tracking house price inflation at more than twice the rate of earnings growth. In London, the extent of monthly price falls has moderated, and 56% of postcodes are registering month on month price gains.
The impact on the UK economy of a hard or ‘no deal’ Brexit, and the knock-on impact for the housing market, has been a topic of much debate recently. Despite uncertainty around Brexit compounding the market slowdown in London, our analysis of income to buy indicates there is further scope for price growth in the most affordable cities, where prices are currently rising fastest.
UK city HPI moderates to 4.2% year on year ranging from +7.5% to -4.0%. Nottingham and Leicester are the fastest growing cities, with London slipping into negative annual growth. Recovery since the financial crisis varies widely - three cities have prices below the levels a decade ago while four cities have prices >50% higher than in 2008.