House price growth hits double figures in H2

City level house price inflation has accelerated in the second half of 2015 to 10.1% due to scarcity and rising demand, according to the latest Hometrack house price index.

Related topics:  Finance News
Rozi Jones
21st December 2015
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Despite a stronger second half, transaction volumes for the year as a whole look set to be 5% lower, as fewer homes come to the market for sale.

In the 12 months to November, the fastest rate of growth has been registered in London at 13.3% (14.7% in 2014) which equates to a £52,900 increase in the average value of a home.

The weakest rate of growth has been recorded in Aberdeen where average house prices have fallen by 2.0% after a 12% increase in 2014.

The city with the strongest turnaround over the last 12 months has been Glasgow where house price growth has accelerated from 1.8% a year ago to 8.0% today.

New homes starts have risen 5% over 2015 according to the NHBC but new homes comprise just 10% of all sales a year. Policies aimed at providing further support to demand such as Help to Buy and Starter Homes are expected to encourage more supply in 2016.

Scarcity has resulted in a decline in the discount between asking and achieved sales prices for sales in the second half of the year. Hometrack analysis shows the discount is down to just 1% across London City and 2.8% across all other cities in England and Wales as at September. There is a narrowing gap between sales and asking prices which points to further prices rises in the first half of 2016.

House price to earnings ratio 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 or below 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 mortgage at 3.5x income is £49,700, up from £45,200 a year ago.

Perhaps more importantly for mortgage reliant borrowers, debt servicing costs continue to fall with the average mortgage rate on outstanding mortgage debt down to just 3.1%. UK mortgaged households have seen interest payments fall by £1.1bn over 2015. Yet while mortgage rates are low it is the challenge of passing tougher affordability stress tests that is likely to be supressing a proportion of demand for homes. The full impacts of tougher mortgage regulation on the housing market are yet to play out.

Hometrack predicts 7% growth in city level house prices over 2016 with a 1% increase in housing transactions. This is based on a slowdown in the annual rate of growth across London City to 8% as affordability pressures and lower investor demand reduce the upward pressure on house prices.

This is all predicated on interest rates rising in late 2016. Earlier and faster rate rises would negatively impact the level of house price growth more rapidly as this would further impact investor decision making and mortgage affordability for home owners.

Jeremy Duncombe, Director, Legal & General Mortgage Club, commented:

“House prices tend to decrease in the run up to Christmas and the New Year as a result of the falling demand for properties. Despite this, house prices are still up on the same period last year and are likely to climb further in 2016 as a result of the lack of supply and the constraints this has on the mortgage market. The new Stamp Duty rate for buy-to-let properties, which is due to be implemented in March, is also likely to significantly increase demand in Q1 2016,which may act to widen the rift between supply and demand, driving up house prices further in the beginning of the year.

“In order to address this issue and create a healthy housing market, around 250,000 more homes need to be built per year in order to bridge the gap between supply and demand.”

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