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House price inflation is currently sitting at 3.2% annually, with growth ranging from +7.7% in Leicester to -2.8% in Aberdeen. Six cities are registering growth above 6%, while London prices are falling by -0.4%. The impact of Brexit on housing has so far been limited, our lead housing indicators suggest no imminent deterioration in the outlook for prices. However, uncertainty about Brexit has been a compounding factor in the slowdown of the London market, alongside weaker market fundamentals.
City house price inflation ranges from +8% to -3%
The 20-city index is currently registering annual house price inflation of 3.2%. Price growth at a city level ranges from +7.7% in Leicester to -2.8% in Aberdeen.
Six cities are registering annual growth of more than 6%, while in London the average prices are falling by -0.4%. Over the last year the rate of growth has slowed the most in cities across southern England (Fig.1).
Brexit impact on housing limited so far
Two and a half years on from the BREXIT vote, the headlines are dominated by the exit process. Our analysis reveals a limited direct impact from Brexit uncertainty so far. There is a continued narrowing in the size of the discount between asking and sales prices in large regional cities. Buyers are getting less than a 2% discount to asking price in Manchester while in Liverpool the discount is the smallest for 5 years (Fig.2 and Table 2). In addition, the number of sales agreed is increasing, keeping pace with new supply and providing support for above average price inflation (Fig.3).
Brexit uncertainty compounds London slowdown
The timing of the slowdown in London house price inflation, and market activity, aligns to the Brexit vote. Increased uncertainty has impacted demand and recorded sales have fallen by 15-20% since 2014. The ratio of sales to new supply in London has registered a marked increase since 2016 (Fig.3). This trend is also evident in other cities were price growth is weak.
Market fundamentals behind London slowdown
In our view, housing market fundamentals – affordability, tax changes, mortgage regulation – are the main drivers of the slowdown in London. The Brexit vote has been a compounding factor.
London house price growth of 84% since 2009 has far out-paced household income growth and resulted in low yields for investors and double-digit price to earnings ratio for purchasers. Multiple tax changes between 2012 and 2016, aimed at overseas and second home buyers, have impacted demand, especially in inner areas of London. New mortgage regulations and affordability tests introduced from 2014 have effectively capped the amount that mortgaged purchasers can afford to pay in high value cities.
Taking these together it is no surprise that sales have declined in London, and price growth has stagnated. Average prices are up by less than 2% since the Brexit vote in June 2016 while across other cities prices have grown by almost 15% (Fig.4).
Political uncertainty dominates the near term
The near-term outlook for UK city house prices is down to the outlook for the economy and mortgage rates, as well as households’ expectations for employment. While consumer confidence has dipped since 2016, it has not fallen back to the lows seen before 2014. Our index reveals how households in regional markets appear to be shrugging off any uncertainty.
The political debate about the nature and shape of the future relationship with the EU will continue to dominate the headlines in the weeks ahead, coinciding with the usual seasonal slowdown in market activity.
The current political uncertainty means we simply don’t know what the outlook is for the UK economy in 2019 and 2020. Housing markets are intrinsically linked to the health of local and national economies.
Over the last 3 years the Aberdeen housing market shows what happens when an economy suffers from external economic factors that impact jobs and investment, even when mortgage rates remain low.
However, if the Government gets the proposed withdrawal deal, and transition period, approved by Parliament then the outlook for city housing markets in 2019 could well mirror the trends of 2018.Fig.3 – Ratio of sales to new supply
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.