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City level house price growth is running at 8.5% but growth in London has slowed rapidly in the last quarter to the lowest level of quarterly growth for 20 months. Eleven cities are registering higher growth than at the start of 2016 while 9 are slowing.
City house price growth outstrips UK
House price inflation across the UK Cities House Price Index is holding steady at 8.5% per annum, higher than the 5.7% growth recorded twelve months ago. Residential values across UK Cities are registering a higher rate of growth than the overall UK market where house price growth is running at 7.2% per annum. House price inflation continues to run more than three times faster than the growth in earnings as household confidence improves, earnings rise ahead of inflation and low mortgage rates make housing affordable for those with equity.
Growth rates rising across 11 cities
Eleven cities are registering higher rates of capital growth than in January 2016. The majority of these are large regional cities outside the south east of England – Liverpool, Manchester, Cardiff and Birmingham. These cities have attractive affordability on a price/earnings ratio measure with house prices rising off a low base. Annual house price growth currently ranges from 6.6% in Liverpool to 8.0% in Birmingham (Fig.1).
Growth slower across nine cities
Nine cities are registering house price growth lower than at the start of 2016 with the greatest slowdown led by Cambridge, Oxford, London and Aberdeen. Slower growth is a result of affordability, economic and market confidence factors.
London records slowest growth for 20 months
In the last quarter, London residential values have recorded their lowest growth rate since January 2015. Fears of a potential housing bubble, tightening credit terms and concerns over a mansion tax impacted demand for housing in London at this time.
In the last quarter, London residential values have increased by 0.9%, compared to an average of 3.0% over the last 3 years. The recent slowdown is yet to impact the annual rate of growth which is running at 10% but is expected to move towards 5% by the year end.
Supply/demand balance varies across cities
These patterns of relative house price growth are re-enforced by an analysis of property listings and sales data over the last 3 years. Sales rates are close to matching the flow of new property to the market, creating scarcity and supporting house price growth.
In contrast, London has the weakest market conditions with the new supply of homes coming to the market growing faster than sales which have fallen back in recent months on weaker demand. The ratio of sales to new supply is at its highest level for 3 years, re-enforcing the outlook for a continued slowdown in the rate of house price growth across London in the months ahead.
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.