House prices rose by an average of 2.6% over 2017, according to the latest House Price Index from Nationwide.
In December, annual house price growth stood at 2.6% – up from 2.5% in November, but down from the 4.5% rate of inflation recorded in December 2016.
Following an average 0.6% increase on a monthly basis, the typical property value in December was £211,156.
Robert Gardner, the Chief Economist at Nationwide, explains the latest data: “Annual house price growth ended the year at 2.6%, within the 2-4% range that prevailed throughout 2017. This was in line with our expectations and broadly consistent with the 3-4% annual rate of increase we expect to prevail over the long-term (which is also our estimate for earnings growth in the long-run).
“However, this marked a modest slowdown from the 4-6% rates of house price growth recorded in 2016. Low mortgage rates and healthy employment growth continued to support demand in 2017, while supply constraints provided support for house prices. However, this was offset by mounting pressure on household incomes, which exerted an increasing drag on consumer confidence as the year progressed.
“The impact of previous policy changes (including additional Stamp Duty on second homes, changes to tax deductibility of landlord expenses and lending criteria) meant that demand from buy-to-let investors remained subdued in 2017.
“The significant disparity in house prices across the UK has been a recurring theme in recent years. In this respect, 2017 saw the beginnings of a shift, as rates of house price growth in the south of England moderated towards those prevailing in the rest of the country.
“London saw a particularly marked slowdown, with prices falling in annual terms for the first time in eight years, albeit by a modest 0.5%. London ended the year the weakest performing region for the first time since 2004.”
Ewen Bunting, the Head of Sales at independent estate agent James Pendleton, comments on London’s performance: “December may have ended with celebrations, but no one will be punching the air at London’s performance last year. The capital’s final lap of 2017 was more sparkler than fireworks.
“However, the first fall in prices in the capital for eight years was an early Christmas present for first time buyers, as affordability and Brexit remain major issues.
“A generation of house buyers will never have witnessed places like the West Midlands becoming property hotspots while London struggles.
“Strong employment, a lack of property for sale and low interest rates continue to support prices across the country, while the capital is unlikely to respond to the Chancellor’s scrapping of Stamp Duty for first time buyers.
“Looking to the Nationwide’s stark UK map showing annual price changes, London shows the only falls, its red colour blinking sternly at us like a television off switch.
“This year, all eyes will be on whether the regions follow the capital’s lead or come to realise a semi-detached economic reality all of their own, as prices outside London have not risen as sharply.”
House Prices Rose by a Modest 2.6% in 2017, Nationwide Reports
Housing affordability across regions
Gardner looks at house price growth across the UK: “While regional house price growth rates have converged over the past year, there remain significant differences in affordability, reflecting disparities in house price levels.
“To explore how this is impacting potential buyers, we used regional income data to calculate where in the income distribution a prospective purchaser would lie if they were purchasing the typical first time buyer property in each region, with a 20% deposit and borrowing four times their (single) income.
“The picture that emerges is that this typical buyer moves up the income spectrum as you move from the north to the south of the country. In Scotland and the north of England, this buyer would lie in the 30th income percentile, while in the South East, they would be at the 80th percentile and above the 90th percentile in London.
“The variation in affordability across regions has increased over the past ten years. Affordability has improved in Wales, Scotland and the north of England, but the most marked improvement has been in Northern Ireland, where the typical buyer has moved from the 90th percentile to the 40th percentile. This is largely due to the significant correction in house prices in Northern Ireland, which are still around 40% lower than in 2007.
“Meanwhile, in London and the South East, affordability has become even more challenging, with more people priced out of the market or needing to borrow a greater multiple of their income.”
Saving a deposit remains tough for most
Gardner assesses the difficulty that first time buyers face in saving for a deposit: “Another key aspect of affordability is the deposit required and the time taken to save it. A 20% deposit in London is now in excess of £80,000 (based on the average first time buyer house price). This is around £30,000 higher than a decade ago. In other regions, such as the Midlands and northern England, deposit requirements are similar to 2007, though it should be noted house prices were at or near their pre-crisis peak at this time.
“It is arguably even more challenging to save for a deposit than it was a decade ago, due to falling real earnings (i.e. after taking account of inflation) and lower interest rates for savers. Based on the same incomes used for the earnings percentiles above, we have estimated the number of years it would take the typical buyer to save a 20% deposit, based on saving 15% of net income (take-home pay).
“In most regions, it would take around eight years for the typical buyer (as defined above) to save for a deposit. This rises to nine years in the South East and to nearly ten years in London, even though the prospective typical buyer in the capital is in the top 10% of the income distribution.”
Looking ahead to 2018
To help those in the industry understand what’s in store for the property market in 2018, Gardner gives his thoughts: “How the housing market performs in 2018 will be determined in large part by developments in the wider economy. Brexit developments will remain important, though these remain hard to foresee.
“We continue to expect the UK economy to grow at modest pace, with annual growth of 1-1.5% in 2018 and 2019. Subdued economic activity and the ongoing squeeze on household budgets is likely to exert a modest drag on housing market activity and house price growth.
“Nevertheless, housing market activity is expected to slow only modestly, since unemployment and mortgage interest rates are expected to remain low by historic standards. Similarly, the subdued pace of building activity evident in recent years and the shortage of properties on the market are likely to provide ongoing support for house prices.
“Overall, we expect house prices to record a marginal gain of around 1% in 2018. Over the longer term, once the economy regains momentum, we expect house prices to rise broadly in line with earnings (around 3-4% per annum), though if the rate of housebuilding fails to keep up with population growth, prices may outpace earnings once again, as they have in recent years.
“As noted above, the UK housing market has been characterised by significant regional disparities in house prices in recent years and it is not clear how Brexit will impact these dynamics. Much will depend on the nature of the Brexit impact on the UK economy (in terms of its impacts on different sectors and the resulting geographic consequences).”
Quarterly house price statistics
In addition to its December figures, Nationwide has also reported on the latest quarterly statistics (the three months to December).
All regions expect London saw house price gains in 2017. The West Midlands topped the table for the first time ever (based on data back to 1974), with the average house price up by 5.2% on an annual basis. London experienced a 0.5% annual decline and, for the first time since 2004, ended the year as the weakest performing region.
East Anglia – last year’s top performer – saw the greatest slowdown in annual house price growth, from an average of 10.1% in 2016 to 2.3% in 2017.
Wales witnessed a slight pick-up in the rate of growth compared to last year, with a 3.3% annual increase in 2017. Scotland’s rate of growth was similar to last year, at an average of 2.6%. In Northern Ireland, a slight rise in house price growth was recorded, from 0.7% in 2016 to 2.0%.
Last year saw a notable convergence in regional house price growth rates. The gap between the weakest and strongest regions (in terms of annual price changes) is just six percentage points – a record low at year-end.
Price growth in north exceeds south
Average house prices in England rose by 0.5% in the final quarter of 2017 and were up by 2.1% over the year. This is the lowest annual increase since 2012 (when prices fell by 0.4% over the year).
For the first year since 2008, the annual rate of change in northern England (the West Midlands, East Midlands, Yorkshire and the Humber, North West, and north) was above that in southern England (the South West, outer South East, outer Metropolitan, London, and East Anglia). Northern England recorded a 3.6% increase year-on-year, compared to just 1.6% in the south.
Regional growth rates may have converged, but Nationwide continues to report significant disparities in price levels. This is particularly apparent when looking at prices relative to their 2007 peaks. For example, prices in London are around 55% higher than their 2007 levels, while those in the north and Yorkshire and the Humber remain lower.