House prices inflation in cities is picking up pace, with prices rising at a rate of 6.1 per cent a year, according to the latest house price index from Hometrack.
This increase is being driven by “robust growth” in house prices in many regional cities, where affordability is more attractive than in London. Hometrack said this could sustain further house price rises of up to 25 per cent.
Over the past year house prices have increased fastest in Manchester (7.9 per cent) and Birmingham (7.3 per cent). In Aberdeen house prices continue to fall (down 3.1 per cent) while the rate of growth across London has stabilised, at 3 per cent, supported by tightening supply and lower turnover.
According to Hometrack the house price to earnings ratio in London is now at an all-time high of 14.5 times earnings. Elsewhere Oxford, Cambridge and Bournemouth all have double digit price to earning ratios.
Meanwhile strong house price inflation in Bristol has also pushed the price of the average home to 9.7 times earnings.
But cities outside the south east of England have price to earning ratios that are broadly in line with the longer-term 15 year average. Hometrack pointed out that mortgage rates have fallen over this time, boosting the buying power of households.
In its report Hometrack said: “Despite the recent increase in interest rates we continue to believe that house prices in regional cities have further upside given the current position of housing affordability and the similarity of the current housing cycle to the last cycle.
“However, establishing a sustainable price to earnings benchmark at city level that is consistent with lower mortgage rates is complex. The London price to earning ratio is 40 per cent over its 15-year average, while it is 29 per cent in Bristol.”
It pointed out that if cities such as Leeds, Manchester and Birmingham were to see the price earnings ratio reach 30 per cent over the 15 year average, this would equate to a house price increase of a further 20 to 25 per cent.
Hometrack said: “We believe this is very feasbile so long as mortgage rates remain low and the economy continues to grow. The increases are equivalent to three years of growth at current levels.”
Conversely Hometrack point out that house prices in London would need to fall by 6 per cent in nominal terms to take the ratio to 30 per cent over the 15-year average. For the ratio to reduce to 20 per cent this would require a 13 per cent fall in prices.
eMoov chief executive Russell Quirk says: “”Overall, yet more promising signs for the UK market with city house price growth remaining buoyant in the face of tough market conditions.
“The recent abolition of first-time buyer stamp duty may assist this level of growth as a rejuvenated level of buyer demand further outstripping the supply of housing will see prices continue to climb in the long-term.
“For many trying to get a foot on the ladder, the stamp duty changes will be of little comfort given the continued increase in prices, as the obstacle of affordability and the gulf between this and the earnings on offer is already rather sizable and preventing them from taking that first step.”
He adds: “London continues to be a shining beacon of unaffordability where the earnings to property price ratio is concerned, and it is unlikely that any reprieve of first-time buyer stamp duty will do anything to change that.”