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There are signs that the underlying rate of house price growth has peaked, as thirteen of the twenty cities tracked by the Hometrack Cities Index have registered a slower rate of growth post-election.
City level house price growth tentative slowdown
City level house price inflation is running at 8.4% per annum up from 6.6% in May as a post-election surge in demand continues to put upward pressure on house prices. There are signs that the underlying pace of growth may have peaked. The three month rate of growth expressed on an annualised basis appears to have reached a peak (fig.1).
Table 1- UK 20 city index summary, September 2015
Source: Hometrack House Price Indices
The year on year rate of house price growth masks more volatility in the underlying rate of growth. There is a clear cyclical movement in house prices and since March 2015 the 3 month rate of growth, expressed on an annualised basis has risen to over 16%, slipping back slightly in September to 15%. This will in part be due to seasonal factors with mortgage approvals for home purchase increasing strongly over June and July while falling back 15% in August. The outlook for housing demand remains positive but the question is whether the post-election surge can be sustained. We expect demand to moderate in the run up to the year end with a modest slowdown in the pace of monthly house price growth compared to the last four months.
Signs of slower growth across 13 cities
It is dangerous to read too much into one month’s headline results data but at a city level the average rate of in the last three months has slowed across thirteen of the twenty cities covered by the index.
Discount from asking to achieved prices
The discount between asking and achieved prices averages 3% (fig.2). Newcastle and Liverpool have the largest discount between asking and achieved prices averaging 6% against below average house price inflation of 4%. Cambridge is registering a small premium of 2% as strong demand and scarce supply are sustaining the highest city level price growth.
Wide variation in performance in last 8 years
While city level house price growth is running ahead of earnings, average house prices are still below the levels recorded eight years ago in nine cities. The majority of cities have average prices between +18% in Bristol and -14% in Liverpool. Belfast prices still remain almost half the level seen in 2007 while those in London are 43% higher highlighting there is no such thing as a single UK housing market.
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.