Higher mortgage rates weigh on housing market activity
The housing market continues to feel the impact of higher mortgage rates and cost-of-living pressures. It’s resulting in weaker demand from buyers, fewer sales and very low house price growth.
Our House Price Index for August 2023 shows housing market activity is well below the levels of the pandemic years, although in line with 2019.
In the last 4 weeks, demand from buyers is 34% lower than average in the same period over the last 5 years (2018-2022).
The number of agreed property sales is down 20%. There are more homes for sale now after low supply over the last 2 years, which has supported this figure to a degree.
Southern regions see largest house price falls
There’s been a rapid slowdown in house price inflation over the last year, down to weaker demand, more price-sensitive buyers and fewer sales.
Annual UK house price growth of 0.1% is a virtual standstill. This is the lowest annual growth rate for 11 years, since August 2012.
There is a clear north-south divide in house price inflation. Every region in the South of England has seen house prices fall by up to -1% in the last year.
But all other regions and countries of the UK are posting low single-digit house price growth. Scotland is seeing the highest house price growth of +1.7%.
This pattern reflects the greater impact of higher mortgage rates on higher-value housing markets. Buyers in the South of England need bigger mortgages and deposits as well as higher incomes.
This prices more buyers out of the market in the south, weakening demand and pushing prices down.
Where are house prices falling in August 2023?
House prices holding up in first-time buyer markets
The variation in house price growth across the UK is partly explained by the ability of first-time buyers to buy at higher mortgage rates.
First-time buyers account for 1 in 3 sales a year, most of whom are previously renting. So the difference in the affordability of renting and buying impacts how many renters buy a home.
In recent years, low mortgage rates meant buying was much cheaper than renting on a monthly basis. There were lots of first-time buyers in the market and many could buy larger 3+ bedroom homes.
Now mortgage rates are 5% and higher, renting in the UK is 10% cheaper than buying on average, despite high rental growth in recent years. This is reducing the number of first-time buyers in the market, which limits house price growth.
The experience for would-be first-time buyers varies across the UK.
A renter buying the home they rent would find it cheaper to buy than rent in the 6 UK regions and countries with the lowest house prices.
In Scotland and the North East, average mortgage repayments are up to 18% lower than rental costs. This supports access to the housing market and demand for homes.
In contrast, it is more expensive to buy a home than to rent across all areas of southern England and the Midlands. In London, the average mortgage repayment is 24% higher than monthly rent.
This is a key reason why house prices will fall the most across the South of England.
The actual position is worse for first-time buyers across the UK. Mortgage lenders require new borrowers to be able to afford mortgage stress rates of close to 8.5%, rather than the product rate of 5.6% used in our analysis.
Read more on this topic from my colleague Izabella Lubowiecka: Renting is cheaper than buying a home for the first time in 13 years
21% fewer property sales expected in 2023
While house price growth has slowed rapidly over the last year, the primary impact of higher mortgage rates has been a lower number of sales.
Our House Price Index tracks the number of homes being ‘sold subject to contract’. This is down 21% compared to last year, although we are still on track for 1 million completions in 2023.
It will be the lowest number of property sales since 2012 and the equivalent of every household moving once every 23 years.
We usually consider 8 years to be the average time to move house in the UK. This increase highlights the deep impact of recent economic changes on the housing market.
Mortgaged buyers impacted the most while cash buyers hold steady
Our House Price Index shows the net decline in property sales this year will be 21% compared to 2022.
This fall is largely from mortgaged buyers: we expect the number of mortgaged sales to drop 28% on last year. On the other hand, cash sales will fall just 1% compared to 2022.
Homeowners with a mortgage typically account for a third of annual property sales. This group is under less pressure to move as they already own a home. Where possible, many of them will wait for mortgage rates to improve before they move.
Landlords squeezed by higher mortgage rates
Landlords are also being squeezed by higher mortgage rates. Mortgaged buy-to-let purchases make up around 8% of property sales in the UK.
But buy-to-let investors in southern England now need to have equity of 40-50% of the property’s value to get the numbers to stack up. As a result, new investments will be lower this year.
Flexible working supports first-time buyer sales
When it comes to first-time buyers, we expect fewer to buy in 2023 - but numbers will hold up to an extent. Flexible working gives them options to buy in cheaper markets, where buying costs are cheaper than renting.
Plus, with more landlords selling previously rented homes, there is more supply of homes that appeal to first-time buyers. These are typically priced 25% lower than the wider housing market.
Wage rises boost housing affordability - despite high mortgage rates
Affordability remains the primary barrier to more sales in the UK housing market. By ‘affordability’, we mean both house prices and the cost of mortgage repayments.
Affordability is lowest in southern England - you need a household income of more than £75,000 to buy in many areas. UK mortgage rates are 23% higher than last year, adding an extra £216 per month to the average mortgage repayment.
However, average wage rises of 7% over the last year are improving housing affordability, regardless of higher mortgage rates.
With house prices falling modestly, the difference between house prices and earnings is narrowing. Affordability in this sense looks set to improve by 9-10% over 2023.
As a result, the UK house price to earnings ratio will be 6.3x by the end of the year. This makes buying a house as affordable as the average over the last 20 years.
Homes you can buy for the national average house price
London gets biggest boost to housing affordability
Our House Price Index illustrates that affordability has improved the most in London out of all UK regions.
The house price to earnings ratio in London will drop to single digits for the first time in 11 years, as house price growth in London has been below average since 2016.
We expect wages to continue to rise faster than house prices in 2024. This will improve affordability further, especially in southern England.
Together with mortgage rates falling to the 4-5% range, this will boost the number of sales in line with the long-run average.
What will happen next in the housing market?
Looking ahead, we expect the number of property sales to recover well in the coming 2-3 years.
More flexible working, demographic trends from an ageing population, the strong labour market and high immigration will all encourage people to move house.
In terms of mortgage rates, they’re starting to drift lower and we expect them to fall below 5% later this year. But it’ll be a drawn-out process, relying on financial markets to evaluate how high interest rates need to be to bring inflation under control.
Any falls to mortgage rates are unlikely to impact the market and improve affordability further until at least the first half of 2024.
This is why we’re less optimistic about house price growth, which looks set to stay within the +2% to -2% range for the foreseeable future.
