Edinburgh tops UK city house price growth in year to September 2017

House prices in key cities in the UK increased by 4.9% year on year in September with Edinburgh seeing the biggest growth at 6.7%, the latest index shows

But annual growth is down from the 6% recorded a year ago although a number of cities are still seeing strong growth. As well as Edinburgh, Manchester, Birmingham, Bournemouth and Leicester are all seeing annual growth well above the average.

The Hometrack index also shows that price growth in London has stabilised at 2.3% per annum but over four fifths of markets in the capital city have recorded real house price falls.

Even although annual growth is down, the quarterly rate of growth is at the highest level for 14 months and the report says that this trend has been supported by a nationwide increase in housing sales over the last quarter compared to the previous 12 months. This unseasonal increase in sales is likely a result of households delaying purchases earlier in the year at the time of the general election.

At the other end of the scale Aberdeen is still the only city to see annual price growth decline but in the year to September 2017 this was just 1.8% compared to the fall of 10.6% recorded in the year to September 2016.

There are four other cities where the current level of nominal house price growth is below the rate of consumer price inflation, namely Cambridge, Oxford, London and Cardiff with annual growth of 1.7%, 2.4%, 2.3% and 2.4% respectively.

In London house price growth year on year ranges from growth of 4% in Epping Forest and Gravesham to a fall of 5% in the City of London. There are six markets where house prices are falling in nominal terms, primarily those in inner London and Hometrack says that further price falls in real terms are inevitable as prices re-align to what buyers are willing to spend.

‘Concerns over Brexit and the impact on jobs and employment are weighing on market sentiment while low gross yields, and a weak outlook for house price growth are impacting the case for investing. We expect nominal house price inflation in London to remain in the 1% to 3% range for the next six to 12 months as volumes contract further,’ the report says.

Hometrack also predicts that house prices will continue to rise in regional cities where values are still growing off a low base and affordability remains attractive. ‘The rate of growth is likely to moderate around its current level, tempered by economic and sentiment factors such as the squeeze on incomes from rising inflation, concerns over the economic outlook. Talk of a potential increase in interest rates, with a knock-on for mortgage rates, is likely to further temper demand,’ it points out.

It explains that even a modest increase in mortgage rates will initially impact sentiment and levels of market activity. ‘Mortgage rates remain low by historic standards and, for the last three years, all home owners buying with a mortgage have had to prove they can afford a much higher mortgage rate which is around 7%. Recent sales levels already reflect the ability of buyers to afford higher borrowing costs,’ it adds.

‘Households are already responding to low mortgage rates and almost 90% of new mortgages written in the second quarter of 2017 were taken at fixed rates. Three fifths of outstanding mortgage balances are also at fixed rates providing some insulation to any increase in mortgage rates in the near term. Higher borrowing costs would also impact demand from investors who account for around 20% of all housing sales a year. In the face of an increase in borrowing costs, rational investors should either seek property with higher yields, or look to pay less for homes to generate a higher yield,’ it explains.

‘This means bidding less for housing than they would have if rates stayed low. This would compound the impact of recent tax changes and further moderate investor demand and with it the rate of house price growth in markets where investors have been most prevalent,’ it adds.