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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
UK city house price growth in February 2020 was +1.6%, higher than the +1.2% a year ago. That said, in recent weeks coronavirus has had a rapid impact on housing demand, which is 40% lower in the last week. Transaction volumes are set to decline by an estimated 60% in the next quarter with a further fall in sales volumes over Q3 2020.
This month's Cities Index is the second in a row to record a 3.9% increase year-on-year. This is taking average prices up to a nearly 3-year high. Prices have now also recovered across all English cities to pre-recession 2007 levels. Supply is still flat and outpaced by demand, at 2.6%.
This month’s Cities Index shows a continuation of the strong end to 2019. City house price growth is at a two-year high, at 3.9%. Coupled with a bounce in demand, which at 26% far exceeds the traditional new year boost, we see green shoots of returning market optimism. At a regional level, affordability of local stock is driving growth forecasts for Northern and Midlands cities, while in the South, the picture is more subdued.
Average UK city house prices have increased at an annual average rate of 4.4% per annum. While price falls in the latter part of 2018 suppressed the annual growth rate, these have dropped out of the annual growth calculation and explain the increase in the current annual rate of growth. The outlook for 2020 will be driven by affordability factors. We expect city house prices to increase by +3% over 2020 with above average growth in the most affordable cities and below average growth in cities across London and southern England.