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The pick up in house price growth over the last 18 months has spread across the UK with all 20 cities covered by Hometrack’s index registering house price growth of over 5% per annum. Average earnings are rising at just 1.3% per annum. This is the first time in a decade that all 20 cities have simultaneously registered growth of more than 5%p per annum.
London and Bristol are registering the highest rates of growth at 17.3% and 13.2% respectively. Glasgow and Liverpool are registering the slowest annual growth at 5.5% per annum against a UK average of 9.2%.
Cities with the lowest rate of growth in the spring have seen the strongest pick-up as prices rise off a low base e.g. Glasgow, Edinburgh and Newcastle.
While the trend has been a steady acceleration in house price growth, there are clear signs that momentum is starting to slow. In the three months to May 2014 the average monthly increase in UK house prices was 1%. In the three months to October 2014 this has now slowed to 0.6% as demand softens.
There are a number of factors at play. First there is less pent-up demand for housing than 2 years ago. Those households that wanted to move and were in a financial position to do so are likely to have done so.
Second, the introduction of mortgage affordability tests in April and the more recent introduction of loan to income caps in October are constraining demand from marginal buyers i.e. those requiring a sizable mortgage relative to their income and/or those whose finances are less well able to deal with an increase in interest rates.
Growth across 20 UK cities outpaces earnings
The impact has been particularly evident in London where absolute prices are highest and house price growth has been strongest, especially in ‘emerging market’ areas of inner south east and inner north east London where first time buyers have been active.
Weaker demand is feeding more quickly into house prices in smaller cities such as Oxford and Cambridge where prices are down by an average of -0.4% and -0.8% respectively in the last three months. Price falls have also been registered in Aberdeen (-0.7% ave. in last quarter) where a falling oil price is impacting on market sentiment in an economy buoyed by the strength of the oil price in recent years.
Elsewhere across the largest cities the overall trend has been steady upwards growth with average prices moving back towards levels last seen in 2007.
The emerging slowdown in the housing market will be welcome news for policy makers who want to avoid a debt fuelled acceleration in house prices supported by record low mortgage rates. We expect the rate of house price growth to slow further in the run up to the year end.Fig 3: Relative performance of selected cities
City house price growth is proving resilient with average prices up 5% in 2017H1. Birmingham is the fastest growing city while 4 low growth cities are registering house price falls in real terms.
City house price growth is slower than a year ago but average prices increased 3.5% in last 3 months. There is material upside for house prices outside southern England. In London the rate of growth has dropped from 13% to 3% in the last 12 months.
City house price growth is running at 5.3%, down from 8.7% in April 2016. Eleven cities have a faster rate of growth than 12 months ago. Manchester is the fastest growing city while price inflation in London is at its lowest level for 5 years.
City level house price growth rate is 6.4%, up from 4.9% at the end of last year. 2017Q1 saw city level house prices rise by 3.5%, the highest quarterly rate of price inflation for 3 years. House price inflation in London continues to slow and has now reached 4.9% yoy which means the capital is among the five slowest growing cities along with Oxford and Cambridge.