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Housing

Buying a home in the UK is more expensive than ever. When will house prices go down?

Despite household incomes being hit by the cost of living crisis, house prices have continued to surge. But will they finally start to fall in 2022?

House prices are at record levels and while the cost of living crisis has continued to hit households’ spending levels, it has done little to stop surging prices.

That growing affordability gap is likely to see more people who want to get on the housing ladder and buy a home left disappointed.

In recent months, regular house price round-ups from major property sites Zoopla and Rightmove and the UK’s biggest mortgage providers Halifax and Nationwide have repeatedly reported record rises.

Rightmove reported a fifth consecutive month of record prices in June 2022 with the price of a property coming to market hitting an average of £368,614.

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It’s down to a lack of homes to fill demand, according to Iain McKenzie, chief executive of The Guild of Property Professionals – a national network of 800 independent estate agents.

“Just when it seems that house price growth is starting to slow, along come these figures showing an almost 3 per cent rise on last month,” said McKenzie.

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“The average home now costs over £30,000 more than it did this time last year, but with sluggish wage growth and lower disposable income, it may feel like the goal posts have been moved for first-time buyers. 

“Estate agents are still seeing an imbalance between supply and demand, with potential buyers queuing up as soon as properties come up for sale. When this eventually begins to narrow, we may see house prices cool down to more achievable levels.”

Why are house prices so high?

The housing crisis is nothing new in the UK. Demand has outstripped supply for decades but the disruption of the pandemic has exacerbated the issue with record-high price rises following Covid restrictions.

Chancellor Rishi Sunak introduced a stamp duty holiday to support the property market hit by lockdowns in 2020. That stimulated demand with buyers rushing to complete deals before the tax break ended on March 31 2021.

The move was a major contributing factor to the widest gap between supply and demand in the market since 2013, according to the Royal Institution of Chartered Surveyors.

Since then a lack of new houses and rising demand has seen prices skyrocket.

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House price rises have dwarfed UK workers’ average salary, which was around £32,000 in 2021 and rose only 3.6 per cent in real terms in the previous year.

By contrast, house prices have grown for 11th consecutive months, according to Halifax managing director Russell Galley, and are now around 10 per cent higher than they were in summer 2021.

He said: “The average cost to buy a home in the UK is now £289,099, hitting yet another record high. Despite the very real cost of living pressures some people are experiencing, the imbalance between supply and demand for properties remains the primary reason driving the continued climb in house prices.”

Although the cost of living crisis has slashed household incomes, the lack of affordable homes has kept prices high.

However, there are signs that the record rises seen in recent months are starting to slow.

Nationwide’s analysis found that house price growth in June was up 10.7 per cent, down from 11.2 per cent in May although that meant homes were £26,000 higher in the space of a year.

“There are tentative signs of a slowdown, with the number of mortgages approved for house purchases falling back towards pre-pandemic levels in April and surveyors reporting some softening in new buyer enquiries,” said Robert Gardner, Nationwide’s chief economist. 

“Nevertheless, the housing market has retained a surprising amount of momentum given the mounting pressure on household budgets from high inflation, which has already driven consumer confidence to a record low. Part of the resilience is likely to reflect the current strength of the labour market, where the number of job vacancies has exceeded the number of unemployed people in recent months.”

Zoopla also found that the rate of inflation was starting to cap growth with the lowest monthly growth on the property site since December 2019.

The site’s analysts also reported that buyer demand is starting to decline “week on week” but remains higher than the five-year average.

Gráinne Gilmore, head of research at Zoopla, said: “The increasing cost of living, increasing mortgage rates for buyers  and cloudier economic outlook will act as a brake on house price growth through the rest of the year.”

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Rightmove’s latest figures, released in June 2022, revealed that the average asking price for a home is now £56,000 higher than before the pandemic.

Interest rates also have an impact on the housing market. Paul Johnson, the director of the Institute of Fiscal Studies, warned that rising interest rates to combat inflation could have “really big effects” on mortgage payments in the future.

The Bank of England raised interest rates to 1.25 per cent in June as inflation soared to 9.1 per cent.

That has meant that average monthly mortgage payments have eclipsed rental payments, according to Rightmove.

The average monthly mortgage payment – based on a 90 per cent loan-to-value mortgage at a two-year fixed interest rate for a first-time buyer home with two bedrooms or fewer – sits at £901. This is just higher than the £887 for average monthly rents.

The gap has closed between the two in recent years with rents rising at record rates too. The typical mortgage payment has risen 13 per cent in the last 10 years despite house prices rising by as much as 50 per cent overall thanks to low interest rates. By contrast rent payments are 40 per cent higher than a decade ago.

But not every commentator agrees that a shortage of affordable homes is the true driver of inflated house prices.

A report released by Positive Money at the end of March instead blamed price surges on the transformation of homes into financial assets and the loosening of financial regulation and monetary policy over the last few decades. Wider policy changes such as tax incentives, the right to buy scheme and the deregulation of the private rental market also played a role, according to Positive Money’s senior economist Danisha Kazi.

A YouGov poll released by Positive Money said 54 per cent of British homeowners would be happy for their home not to rise in value if it meant prices remained more affordable for others. 

“The prevalent narrative that house prices are out of reach for so many due to a shortage of homes fails to explain the explosive growth of recent decades,” said Kazi.

“Governments have failed to deal with the housing crisis because of a pervasive view that the public, who are majority homeowners, would be against policies that restrict house price growth. However, the evidence suggests that most people, including homeowners, support a fairer approach to housing which seeks to stabilise prices rather than letting them inflate endlessly.”

Will house prices go down in 2022?

Nothing can last forever and while there is no guarantee that prices will fall in 2022, the current economic conditions mean that it is growing increasingly likely.

The cost of living crisis is likely to hit households’ ability to move home while rising inflation could also see the Bank of England increase interest rates and drive up the cost of mortgages.

Neal Hudson, a housing market analyst for Built Place, said: “While a housing market downturn is far from guaranteed this year, the limited government support for rising household bills ensures that the cost of living crisis is a growing threat to the market.”

Rightmove’s Bannister said that while prices are hitting record levels, price growth is slowing and could sit at five per cent by the end of the year, down from almost 10 per cent in June.

He added: “Entering the second half of the year, we anticipate some further slowdown in the pace of price rises, particularly given the worsening affordability challenges that people are facing.”

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