Eleven cities have a faster rate of growth than 12 months ago. Manchester is the fastest growing city while price inflation in London is at its lowest level for 5 years.
Lower growth over the last 12 months is largely a result of prices increasing by just 0.1% over 2016H2. In the three months to April 2017, average prices have increased by 3.2% with above average growth recorded in large cities such as Manchester (4%), Birmingham (3.8%) and Edinburgh (3.7%).
Divergence in growth rates over last year
Eleven of the twenty cities are registering higher growth than at the same time a year ago. This includes Aberdeen where price falls have moderated. Annual price growth is lower across nine cities with a material slowdown in the highest value, most unaffordable cities such as London. Manchester continues to register the fastest growth rate of 8.4%, up from 6.3% a year ago. The ratio of sales to new supply in Manchester indicates relatively tight housing supply which points to continued upward pressure on house prices.
Cities in the Midands registering robust growth
Other cities with above average growth include Leicester (7.7%), Birmingham (7.7%) and Nottingham (7.2%). Rates of growth in regional cities are overtaking growth in previously high growth cities such as Bristol and London.
Rapid price deceleration in most unaffordable cities
The scale of the recent deceleration in house price inflation across cities in southern England is stark. London, Cambridge, Oxford and Bristol have all seen the rate of growth slow from double to single digits over the last year. This steep deceleration in growth reflects weaker levels of demand from home owners and investors in the face of affordability constraints, tax changes and weaker market sentiment.
Current trends consistent with mortgage demand
Data from the Council of Mortgage Lenders show the numbers of mortgage borrowers in the first quarter of 2017 are the same or higher than the first quarter of 2016 in all regions outside southern England. Only in London were mortgaged homeowner numbers materially lower, down by 19%, on 2016 Q1. Lower numbers were also recorded in the South East (-9%) and South West (-6%). Taken together with a 30% decline in buy to let purchasing it is clear that demand for housing in southern England is moderating and impacting price inflation.
Lowest price inflation in London for 5 years
The annual rate of house price growth in London has declined from 13.0% a year ago to just 3.5% in April 2017. This is the lowest level of annual growth for 5 years. Average prices have posted a modest gain in the 3 months to April but the current quarterly growth rate is less than half the level recorded over the last 4 years.
Looking ahead we expect current trends to continue with house price growth losing momentum in cities across southern England where housing unaffordability is at a record high and has priced large numbers of households out of the market. Weaker investor demand supports this trend, taking demand out of the market and adding to supply as investors look to rationalise and de-leverage portfolios in the wake of tax changes.
Real price falls in London over 2017
We expect house price growth in London City to slow towards 2-3% by the end of 2017. With the underlying level of consumer price inflation increasing this means London is set to record a real terms drop in prices over 2017, the first time this has happened since 2011.
Price rises to continue in large regional cities
Outside southern England we expect prices to continue to increase over 2017 as households take advantage of low mortgage rates and an improving economic outlook. On paper, there is material upside for prices outside southern England but much depends on how market sentiment is impacted by the General Election, rising inflation and a growing focus on the Brexit negotiations later in 2017 and into 2018.
Scarcity of homes for sale a new norm
One more certain aspect of the market is the availability of homes for sale which we expect to remain constrained. In our view this will tend to keep the upward pressure on house prices in those markets where affordability remains attractive.
