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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.
UK city house price inflation ticks higher
UK city house price inflation has averaged 4.4% per annum over the last decade with average prices up by total of 54% since 2009. The headline rate of growth currently averages 3.4%, supported by price falls in the final months of 2018 dropping out of the annual growth rate and a further pick-up in growth in London. Price growth ranges from -0.7% in Aberdeen to +5.4% in Edinburgh (Table 2).
Marked difference in current and long run growth
There is a marked difference between the current and 10-year growth rates across UK cities (Fig.2). Cities in southern England have registered a marked slowdown in price inflation over the last 1-3 years with current growth rates well below the 10-year average – Oxford, Southampton, Portsmouth, London, Cambridge, Bristol.
In contrast, cities that have been slow to see prices recover, registering some of the lowest price growth over the last decade, are those currently registering above average growth e.g. Belfast, Liverpool, Glasgow.
Prices unchanged over last decade in two cities
Average prices are virtually unchanged between 2009 and 2019 in Aberdeen and Belfast. These two cities have recorded very different experiences over this time with prices falling for seven years until 2013 and then recovering steadily in Belfast. In contrast, house price growth accelerated between 2012 and 2015 in Aberdeen and have subsequently fallen by 21% as the oil price decline impacted demand for housing.
London over the last decade – a tale of two halves
The performance of the London market over the last decade falls into two distinct phases, pre- and post 2016. Prices in London have increased by 74% since 2009, an annual average of 5.4%. Most of the price gains in London came in the years running up to 2016 when unsustainable growth stretched affordability levels which were compounded by multiple tax changes and weaker sentiment.
The rate of price inflation has picked up recently as available supply falls and sales increase off a low base. Despite this, growth is still running at a third of the 10-year average. While there has been a 3-year repricing process, against the backdrop of lower sales, we expect affordability constraints to limit price growth in London over 2020.
Affordability fundamentals a key driver looking ahead
We have analysed the drivers of UK house price growth since 2009. The annual increase in prices is largely explained by the fundamentals of lower mortgage rates and rising incomes. There is little evidence that prices have been pushed higher by households increasing the amount of income spent on housing, as was the case in the years running up to 2007. This reflects greater caution on the part of buyers and new mortgage regulations testing affordability for new purchases.
Looking ahead, the outlook for the UK and city housing markets in 2020 will continue to be dictated by market fundamentals – primarily housing affordability.
Change of Government doesn’t shift fundamentals
While a new Government, and the prospect of a Brexit withdrawal deal becoming law in early 2020 will reduce uncertainty, neither of these will change market fundamentals in our view. While we expect a return of some pent-up demand in 2020 Q1 across all cities, affordability pressures will remain a constraint to demand and the scale of growth in 2020.
The development of housing affordability across cities
Housing affordability, as measured by the price to earnings (p/e) ratio, has remained broadly stable across most cities with house price growth running in line with – or slightly below – the recent growth in average earnings (Fig.3). Notable exceptions include Aberdeen where the price to earnings ratio has fallen 30% since 2015.
Affordability in London improves by 10% since 2017
Modest house price falls in London has resulted in the p/e ratio declining from a high of 14x in 2017 to 12.7x today. This 10% decline takes the p/e ratio back to a level last seen in June 2015 but it is still well ahead of the 20 year average (9.2). A similar trend has been registered in Cambridge and Oxford.
While there are signs of firmer pricing in cities across southern England, we expect affordability pressures to limit the scale of price growth over 2020 across southern cities. We believe the headline, annual price growth in London will be 2% on the back of constrained supply and more realistic pricing.Fig. 3 – Affordability - house price to earnings ratio
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.
UK city house price inflation is higher as prices start to firm up in London and Southern England. Large regional cities continue to post above average price growth on the back of rising demand and attractive affordability, supported by low mortgage rates. London is experiencing its highest rate of growth for 2 years and follows a period of modest price falls.
HPI is currently running at +2.4%, half the average growth over the last five years, and below average earnings growth. Time to sell has hit a 3 year high, while discount to asking price has widened across UK cities. Despite this, underlying market conditions still vary widely across large areas of the country.
With HPI moderating at 1.9%, it appears the slowdown in house price growth is an indication of a return to a more sustainable pace of price growth. However, a change in buyer mix from cash buyers to those with mortgages, plus wide variance in the recovery of house prices is sending mixed signals about current housing market activity.