Prices are now falling in 43 per cent of London’s local authority areas by as much as 3.2 per cent, which explains why the headline rate of growth in the capital has slowed to 0.4 per cent.
London is one of five cities including Cambridge, Oxford, Belfast and Aberdeen, where house prices are falling in real terms as growth remains below the current rate of consumer price inflation, currently running at 2.4 per cent.
As house prices in regional cities continue to significantly outpace London, the difference in value of homes in these cities is beginning to narrow, says Hometrack.
The average home in London is currently worth £491,200, which is considerably higher than the average cost of a house in most other UK cities, but the gap is beginning to close.
The relative price difference with London currently ranges from 88 per cent in Cambridge to 24 per cent in Liverpool.
This means that the average value of a home in London is four times more expensive than in Liverpool, three times more expensive than in Manchester and just over twice as expensive than in Edinburgh.
The relative pricing of housing in London compared to other UK cities reflects variations in the timing and levels of economic growth, incomes, job creation, available supply and the net flow of investment into housing.
Hometrack expects the gap in prices between London and other UK cities to close further over the next 12 to 24 months as London house prices under-perform the rest of the market.
This is following a similar to pattern to 2002-2005.
At that time, London house price growth was weak after a period of out-performance from 1996-2000. In contrast regional housing markets had under-performed and only started to register strong growth from 2001 onwards which closed the gap to London.
“We expect house prices to keep rising across regional cities such as Birmingham, Manchester and Edinburgh over the next two to three years. During this time house price growth in London will remain flat with annual price rises of approximately zero to 2.0 per cent. As a result, the gap between house prices in cities outside of the South East and house prices in London will continue to contract” explains Richard Donnell, insight director at Hometrack.
“Naturally, the relative price gap between cities fluctuates over the course of the housing cycle as supply and demand is affected by factors such as economic growth, job creation, wage increases and the flow of new investment. This has certainly been evident in Aberdeen where the fall in the oil price has impacted housing demand and house prices.”
Donnell concludes: “Hometrack expects that Manchester and Birmingham will close the gap to London fastest in the coming years as these cities are likely to see the strongest jobs growth. The level of house price inflation seen in large regional cities during the last peak, between 2000 and 2003, gives a good indication of how much prices may rise this time around. If history is to repeat itself and these cities are to get back to where they were, then prices could increase by as much as 20 to 25 per cent.”