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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 inflation is 6.1% as price growth picks up speed, driven by regional cities where affordability levels, measured on a price to earnings basis, are in line with the 15-year average. In London affordability is at an all-time high of 14.5x earnings.
City house price inflation is running at 4.9%. Edinburgh is the fastest growing city, overtaking Manchester. House price inflation across London City is 2.3% although low growth means 85% of markets are registering price falls in real terms. We consider the outlook and the impact of a possible increase in interest rates.
City house price inflation is being sustained by above average growth in regional cities while prices in London have stabilised but are falling in real terms. New analysis finds the value of housing across UK cities exceeding £3 trillion of which two thirds is accounted for by London.
City house price inflation is running at 5.3%. The sharp slowdown in London house price growth over the last year has reversed with an increase in the annual rate over the last month rising from 2.3% to 2.8%.