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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
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 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.