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City level house price inflation hits 10% growth in 2015 PDF Print E-mail
Monday, 21 December 2015

Hometrack’s UK Cities House Price Index has recorded annual house price growth 10.1% per annum. This double digit growth has been driven by a chronic shortage of homes for sale particularly in the latter half of 2015 which is reflected in the 5% drop in open market transaction volumes.

Moving amongst existing mortgage homeowners accounted for the lowest share of housing sales in a decade (33% compared to 50% in 2007).This group are a vital source of new supply alongside new homes which account for 10% of sales a year. Strong demand from investors, most of whom are not sellers, has also exacerbated the erosion of available supply.

The real engine for house price growth in 2016 looks set to come from regional cities which have recorded much lower levels of house price growth in the last few years and affordability levels are far less stretched. House price to earnings ratios are well ahead of the long run average in London, Oxford and Cambridge yet across all other cities affordability on this measure is in line with the average over the last 12 years. Across the 20 cities covered by the index the average income to afford a home with an average 76% mortgage at a 3.5x income mortgage is £49,700, up from £45,200 a year ago

While the average mortgage rate is at an all-time low of 2.6% the reality is that existing mortgaged home owners outside the south east seem reluctant to take on debt to bid up the cost of housing. Debt servicing costs continue to fall with the average mortgage rate on outstanding mortgage debt down to just 3.1%. UK households have seen interest payments fall by a further £1.1bn over 2015.

The recent policy interventions are set to have a mixed impact on the market. Investor demand is set to weaken over the course of 2016 as a result of stamp duty and tax relief changes announced earlier in the year. The tax relief changes are likely to result in some modest dis-investment as investors de-leverage their portfolio. Despite these changes, private investors will remain an important feature of the housing market but scale growth in investor demand will slow in 2016.

Looking ahead to 2016 Richard Donnell, Director of Research, Hometrack, said: “The scarcity of homes for sale looks set to remain a feature of the market in 2016. This will only ease once we see greater levels of output from home builders and renewed activity amongst the 8m existing mortgaged home owners.

“Questions over the sustainability of house price growth are being raised as house prices accelerate on growing scarcity and lower sales volumes, especially in the high growth markets such as London. The greatest focus is on the influence of investor buyers, who we estimate account for one in every five buyers nationally. This group don’t need to buy homes and could react differently to home owners in the face of changing market or economic conditions.

“Assuming the first interest rate rise is in the second half of 2016 then we expect 7% growth in city level house prices over 2016 with housing transactions broadly flat. This is based on a slowdown in growth across London as affordability pressures and lower investor demand ease the upward pressure on house prices. Earlier and faster rate rises than those assumed by the market would reduce the scale of house price growth as they would further impact investor demand and mortgage affordability.”

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