Despite Media Propaganda, House Prices No Longer Set To Fall? What Does The Latest House Price Index Show Us...

Buyer demand recovers as housing market rebalances

The housing market is seeing a steady and sustained recovery in buyer demand and continued growth in the number of agreed property sales. House price growth is still slowing but a major price re-correction is now very unlikely. Demand from buyers reached its highest level this year after the Easter break and is 14% higher than in 2019, but still 42% down on this time last year.

The number of homes for sale continues to rise and is now 66% higher than a year ago. This is boosting choice for buyers, driving 6% more agreed sales than in 2019 which is in line with the 5-year average. The housing market remains on track for 500,000 sales in the first half of 2023. There have been the most property sales in Scotland, the North East and London, which reflects better affordability in the former areas. Meanwhile, London has recorded weak price inflation over the last six years which has improved affordability.

Worst of the monthly house price falls are now behind us

Annual house price growth has slowed to 3%, while house prices have fallen by -0.7% over the last three months across all regions and countries of the UK. There are early signs that the level of monthly house price falls are now reducing and that the biggest drops in house prices are behind us. We're expecting low negative annual growth by the summer and for house prices to have fallen -1% by the end of 2023. Annual house price growth currently ranges from 4.8% in Wales to 0.5% in London, less than a third of their rates this time last year.

At a localised level, there are modest year-on-year price falls of up to -2.1% across six parts of inner London and three parts of Aberdeenshire. House prices continue to rise in all other areas of the UK but at a much slower rate than a year ago, as a modest repricing process continues to run its course.

First-time buyers were the biggest buyer group in 2022

The resilience of homebuyers in the face of higher mortgage rates has been impressive. This is a result of tougher mortgage affordability testing since 2015. First-time buyers have also proven resilient. We estimate that first-time buyers using a mortgage accounted for over 1 in 3 sales last year (34%). This made them the largest group of home buyers, followed by existing home owners using a mortgage (31%) and cash buyers (25%). While higher mortgage rates should hit first-time buyer demand the hardest, the majority (around 75%) of first-time buyers come from rentals.

Rents are rising steeply and have increased 11% (or £1,120) over the last year alone. A severe shortage of homes for rent - with a third fewer rental homes available than the long-run average - is pushing more renters into home ownership, particularly as mortgage rates have fallen to 4.5% recently. The main constraints for first-time buyers are saving for a deposit and having the right level of income to afford a mortgage, which varies widely across the country.

First-time buyers need to earn £7,350 more to buy a three bedroom home

The House Price Index tracks the type and price of homes that first-time buyers want to buy. It means we can calculate how much they need to earn and save to buy a house.

On average, first-time buyers spend £230,000 on a three bedroom house and £210,000 on a two bedroom house.

The rapid growth in house prices over the last 3 years means first-time buyers now need bigger deposits and higher household incomes.

To buy a two bedroom home, a first-time buyer needs:

• a deposit of £31,500 (an increase of £3,000 since 2020)
• a household income of £51,000 (an increase of £4,900 since 2020)

To buy a three bedroom home, a first-time buyer needs:

• a deposit of £34,500 (an increase of £4,650 since 2020)
• a household income of £55,900 (an increase of £7,530 since 2020)

First-time buyer affordability worsens most in southern England

The impact of higher house prices on what first-time buyers can afford is different across the country. It depends on how expensive house prices are and how much they have changed over the last three years. First-time buyers have faced bigger house price increases in southern regions than they have in northern regions.

In higher-value markets such as London and the South East, the income needed to buy a home has increased by up to £12,150 for three bedroom homes since 2020. The greatest increase in the income needed to buy a two bedroom home is £7,300 in the South West and East of England. In lower value markets, there is a smaller increase as the pricing of first-time buyer homes is generally lower. It's no surprise that market activity is holding up better across the North of England, Wales and Scotland where housing is more affordable than in southern England.

How are first-time buyers handling affordability pressures?

Faced with increased buying costs, first-time buyers are changing their strategies to get onto the property ladder. One option is taking out a mortgage with a longer term to gain extra buying power. Taking a 35-year loan would provide a home buyer with a 20% boost to buying power compared to a 25-year loan. However, the cost of this choice is paying 48% more in mortgage interest payments over the life of the loan.

Another option is to try and save a larger deposit or borrow more from the ‘Bank of Mum and Dad’ where they can. This is a growing challenge for renters where more of their money is going towards rising rents, while also increasing their urgency to buy a home. Some first time buyers are getting onto the property ladder by buying a cheaper and lower-cost home.

Lower mortgage rates in recent years have enabled first-time buyers to purchase larger homes, typically with three bedrooms. Three bedroom homes are still the most in-demand property type, but the proportion of buyer interest in these properties has fallen back to 40% in the last three months. The ability for more people to work from home is encouraging some first-time buyers to look further afield to get the size of home they want at the right price.

This explains why we haven’t seen a bigger shift in what first time buyers want to buy. It means demand for homes in suburbs of towns and cities with good transport into major employment centres will be holding up - and so will price rises in these locations.

House price growth remains above average (over 5%) in areas such as:

• Oldham in the North West which is accessible to Manchester
• Wolverhampton in the Midlands which is accessible to Birmingham
• Selby in Yorkshire which is accessible to Leeds.

What's going to happen in the housing market this year?

The worst of the house price falls in response to higher mortgage rates appear to be behind us. House price growth will slow further over 2023 and will turn into annual house price falls by the summer. More important is the fact that the number of property sales is continuing to rise. The housing market is arguably more balanced between supply and demand than it has been for some years. It’s clear that there is a range of demographic and social factors continuing to motivate households to move home. If sellers continue to be realistic on pricing, then there is a chance for up to 1.1 million sales in 2023 which would be a very positive outcome.