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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.
City house price growth running at 7.7%
UK city house price inflation is running at 7.7%, up slightly on 12 months ago (7.3%), and in line with our projection for 7% capital value growth over 2016.
Three distinct city level trends
Comparing the current rate of house price growth to that registered 12 months ago reveals three distinct trends for price appreciation.
Cambridge records fastest slowdown in 2016
Cambridge has recorded the most pronounced slowdown in the rate of growth over the last 12 months down from over 12.5% to 2.5% today.
Underlying rate of growth in London slows to 3%
The momentum in London house prices continues to dissipate post the Brexit vote. The annual rate of growth is down to 7.6%, the lowest level for 39 months (3.3 years). Fig. 2 compares growth rate over the last 3 months expressed on an annualised basis (the underlying rate) to the annual rate of price growth. It shows how the underlying rate of growth in London is c.3% as demand weakens on affordability pressures and multiple policy changes aimed at investors.
Change in housing sales by city varies widely
Housing transaction volumes provide an important insight into the underlying trends in demand for housing. Analysis of national housing sales volumes points to flat transaction numbers over 2016.
Extrapolating from the latest available data we have estimated the likely change in sales volumes at city level over 2016. All cities have registered a 50-60% increase in sales volumes over the last 5 years. Cities where house price growth has been high, and affordability levels are most stretched, have seen sales volumes level off over the last 2 years and fall back over 2016. Sales are set to contract by more than 5% in London, Aberdeen, Bristol and Cambridge.
In contrast, the cities registering sustained growth in house prices are expected to record higher turnover over 2016. The greatest increase in turnover over 2016 is expected in Birmingham, Leeds, Leicester and Nottingham.
Outlook for 2017
Looking ahead to 2017 we expect weaker growth in real household incomes and concerns over the impact of Brexit on the economy to weigh on housing market sentiment, particularly in southern England. While the economy is projected to grow in 2017, levels of employment are forecast to grow more slowly although mortgage rates are expected to remain low by historic standards.
Given the current projections for the economy, we do not believe that any of the cities covered by the index will be registering year on year price falls at the end of 2017. However, we do expect the rate of city level house price growth to slow over the next 12 months led by weaker growth in cities across southern England. This is where affordability pressures on home owners are most extended and where previously buoyant investor demand has been impacted by fiscal changes and by tougher underwriting standards for mortgaged borrowers.
While we expect some moderation in the rate of house price growth from current levels in larger UK regional cities, such as Birmingham and Manchester, we believe the underlying fundamentals in these markets remain attractive and there is potential for further price appreciation over 2017. Fig.3 shows that market conditions continue to strengthen on rising sales volumes and attractive affordability
City level house prices projected to rise 4% in 2017
While the current consensus forecasts for UK house price growth is c.2-3% over 2017, we believe that city level house price growth will run slightly higher at 4% over 2017 with growth supported by large regional cities. The outlook for 2017 depends upon the scale of the slowdown in London.
We expect our London index to register nominal growth of 2% in 2017. This will equate to a fall in real terms. A harder landing for house prices could drag the headline rate lower. While house prices are registering small, single digit price falls in central London areas, a lack of forced sellers is expected to minimise the scale of price falls. Figure 3 shows how supply is already tightening in the face of weaker demand which is a natural market response.
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.
City growth ranges from +7.6% in Manchester to -2.8% in Aberdeen. 3-month growth rate in London is increasing as sellers become more realistic on pricing, while discounts from asking prices in London are narrowing for first time in 2 years. Manchester has the lowest level of price discounting.
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.
Large regional cities are the strongest perfomers with signs of slower growth across the south coast. The pace of overall city level growth is losing momentum, partly due to static prices in London.