London is ending the year with negative house price growth for only the second time in 23 years, according to the latest UK Cities HousePrice Index from Hometrack.
The report shows that house price growth across the largest cities in the UK has slowed to an average of 2.6% over the past year, which is the slowest rate of inflation since 2012, due to ongoing price declines in London and a sustained slowdown across areas in southern England.
House prices in London have dropped by an average of 0.1% over the last 12 months, making 2018 the second time in 23 years that the capital has ended the year with negative growth.
Property values are falling across two-thirds of local authority areas across London, by up to 3.5% (in Camden), while prices are rising in a third of markets, by up to 2.0% (in Barking and Dagenham).
Nevertheless, recent house price declines are doing little to materially change the affordability picture in London. The house price to earnings ratio peaked at 14x in 2016 and has started to fall, but remains stretched, at 13.3x.
Edinburgh currently has the fastest growing house prices of all UK cities (at an average of 6.6%), with increases in Manchester and Birmingham also running at more than 6.0%.
However, just four cities are recording higher levels of house price growth than this time last year – Manchester, Liverpool, Cardiff and Newcastle.
The cities that have seen the greatest slowdowns in property values over the past year are all located in the south of England: Bournemouth, Portsmouth and Bristol.
Affordability pressures have increased in these cities over the last 12 months, and they now record the highest house price to earnings ratios outside of London, Oxford and Cambridge.
Over the course of 2019, Hometrack expects UK city house prices to rise by an average of 2.0%, as above average growth in large regional cities offsets price falls in London.
Property values in the capital are forecast to register decreases of up to 2.0%, while, in more affordable cities, such as Liverpool and Glasgow, prices could rise by another 5.0% next year.
Richard Donnell, the Insight Director at Hometrack, says: “The diversity of London’s housing markets is shown by the clear divide between low house price growth in outer London and commuter areas, and nominal price falls concentrated in high-value inner areas of the capital. In 2019, we expect prices to continue to fall most in central areas of London. Our projection for a 2% fall in overall London prices will reduce the price to earnings ratio to 12.8x, in line with levels last recorded in mid-2015.
“Outside of London and the south, affordability levels in regional cities remain attractive, but this is changing. House price growth has run well ahead of earnings growth for the last five years and, together with small increases in mortgage rates, as well as growing economic uncertainty, the speed at which households bid up the cost of housing is reducing.”
He adds: “The fundamentals of housing affordability will shape the prospects for city house prices in 2019. This is already the case, with flat to falling prices in the most unaffordable cities, and above average growth in the more affordable areas. Ultimately, the speed at which affordability translates into price changes depends on economic factors, changes to mortgage rates and household sentiment. Brexit is the greatest driver of uncertainty in the near term and the prospects are for a slow start for the housing market in 2019.”