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City level house price growth is holding steady at 8.4%. This month we reveal an updated view on city level affordability. This finds that after an 86% uplift in house prices since 2009, the price to earnings ratio in London now sits above 14x with Oxford and Cambridge close behind. Other cities are at or below their long run average. Read the Report to find out what this means for city level house price inflation.
City house price growth outstrips UK
City level house price inflation is running at 8.4% as the upward momentum in house price continues. Bristol remains the fasting growing city (10.6%) but the rate of growth is slowing. Aberdeen continues to register a year on year price falls (-8.1%).
The impetus for house price growth is shifting from the affordability constrained cities in southern England to cities in the midlands and the north of England where affordability remains attractive.
Price to earnings ratio in London at record high
An update of city level affordability reveals that the price to earnings ratio ranges from 3.7x in Glasgow to 14.1x in London, compared to a UK average of 6.5x. London has the highest price to earnings ratio on record as a lack of supply and strong demand fuelled by low mortgage rates has resulted in an 86% increase in house prices since 2009, far in excess of earnings growth. Cambridge and Oxford also have double digit price to earnings ratios which are well ahead of the average over the last 12 years.
City affordability in line with long run average
Affordability across other cities is more in line with the long run average, although strong house price growth in Bristol in the last 2 years has pushed the price to earnings ratio to 9.2x. Three cities have price to earnings ratios that are below the long run average, namely Glasgow, Liverpool and Newcastle where house price growth is starting to increase off a low base.
As affordability levels become stretched, fewer households can participate in the market which will lead to reduced levels of turnover and a resulting slowdown in the rate of house price growth.
London growth close to 3 year low
The year on year rate of house price growth across London has slowed close to its lowest level for 3 years (9%). We expect growth to slow to low single digits in the next 6-12 months as demand softens in the wake of a raft of fiscal policy changes aimed at overseas buyers and investors as well as concerns over the impact of Brexit on the economy. The Hometrack Central London index which covers the top 5% of the London market by value and is already registering 0% house price growth.
In the short term we expect regional cities to continue to drive house price growth. Many of these cities have seen relatively limited house price growth in the last 6 years and have significant upside for house price inflation (table 2). This is subject to the outlook for the economy, borrowing costs, earnings growth over 2017 as the Brexit process is started. We will focus on the outlook for 2017 in more detail in the next edition of the index.
UK city house price growth in February 2020 was +1.6%, higher than the +1.2% a year ago. That said, in recent weeks coronavirus has had a rapid impact on housing demand, which is 40% lower in the last week. Transaction volumes are set to decline by an estimated 60% in the next quarter with a further fall in sales volumes over Q3 2020.
This month's Cities Index is the second in a row to record a 3.9% increase year-on-year. This is taking average prices up to a nearly 3-year high. Prices have now also recovered across all English cities to pre-recession 2007 levels. Supply is still flat and outpaced by demand, at 2.6%.
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.
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.