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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.
Strong end to 2017
The annual rate of UK City house price inflation has increased to 6.3%, up from 4.9% a year ago. The rate of house price growth has accelerated over the last six months with robust demand for housing in regional cities outside southern England.
Scottish cities top growth league table
Housing market activity across Scotland has picked up over 2017 and this has resulted in Glasgow recording the highest rate of house price growth (7.9%), followed by Edinburgh (7.6%). Leicester and Birmingham are two other cities registering house price growth over 7%. Aberdeen continues to register price falls with average values down 3.7% over the last 12 months.
Fastest growth in cities with weaker recovery
Figure 2 compares the annual rate of growth by city against the current level of prices compared to the peak of the last housing cycle in 2007. The highest annual growth rates are being registered in cities where house prices are at or below their 2007 levels in nominal terms. Housing affordability remains attractive in these cities compared to the long run average.
Prices rise on higher turnover in Scotland
Changes in the level of housing turnover provide important context for the underlying health of city level housing markets. Our provisional estimates for turnover in 2017, shown in figure 3, reveal an increase in turnover in Scottish cities over 2017. Despite headline price falls since 2014, Aberdeen is set to register higher sales over 2017.
Prices rise on lower volumes in southern England
The change in city level housing turnover over the last three years has varied widely reflecting differing strength in underlying demand. Eight regional cities have recorded growth in turnover exceeding 5% per annum over the last 3 years led by Liverpool, Manchester, Glasgow and Birmingham. These cities are where there has been sustained price inflation over the last year as underlying demand for housing improves.
At the other end of the spectrum, housing turnover has fallen across cities in south eastern England over the last 3 years including London, Oxford and Cambridge. Record high affordability levels have priced growing numbers of households out of the market and this has reduced turnover. This in turn has created an element of scarcity which has supported prices in the absence of forced sellers. We expect levels of turnover to continue to decline further in these southern cities over 2018.
City house prices expected to increase by 5% in 2018
A year ago, we predicted that UK city house price growth would be 4% as a continued recovery in regional city house prices would offset very low nominal growth in London.
We expect 2018 to follow a similar pattern. As we highlighted last month, there is 20-25% of additional upside in house prices in regional cities were price to earnings levels to move above their 15-year average. That is before any additional allowance for the impact of lower mortgage rates. With the clouds of uncertainty around Brexit lifting very slightly we expect regional cities to continue to deliver above average house price growth in 2018.
For London we expect the rate of house price inflation to remain in low single digits over the course of 2018. London is facing a drawn-out period where house prices and earnings need to re-align. Our central view is that this will be achieved through single digit real house price falls over several years on lower sales volumes. London’s home owning households have a significant equity buffer against which to absorb price reductions but the willingness to accept lower prices takes time to feed through into agreed sales prices. Only seven of the 45 local authorities that comprise the London City index are registering year on year price falls in nominal terms.
Fig. 3 – Change in city housing turnover
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.
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.