House prices have surged since the pandemic, pushing the price of a new home beyond some buyers. Will that change this year? Image: Unsplash / Super Straho
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House prices soared to record highs last year, but that now almost seems like a distant memory as rising interest rates and the cost of living crisis have started to take a toll and sending prices falling and the number of sales tumbling.
However, that does not necessarily mean it’s all good news for people looking to get on the housing ladder. With deposits still out of reach for many first-time buyers and difficulties in securing a mortgage, homeownership is still a tricky proposition.
Average prices reached record levels in England, Wales and Scotland in 2022, according to the Office for National Statistics (ONS).
But since then they have declined.
The average UK house price, measured against final transaction prices, was £288,000 in June 2023, the ONS found. However, this was still £5,000 higher than in June 2022.
Nationwide’s seasonally adjusted measure found house prices were falling at the fastest rate since 2009. The building society saw prices fall 0.8% from July to August, while prices are 5.3% down on August 2022.
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The number of homes being sold has fallen to its lowest level since 2012, according to Zoopla. The property site found the number of sales were down by more than 20% compared to last year.
But the affordability gap is still seeing people who want to get on the housing ladder and buy a home left disappointed.
The ONS found full-time employees in England would have to spend 8.3 times their annual earnings to buy a home in 2022 while people in Wales would have to spend 6.2 times their yearly salary.
Homes have become considerably less affordable in the last 25 years. Back in 1997 people living in 89% of local authorities could pay less than five times their annual salary to own a home. In 2022 that was true in just 7% of areas.
Iain McKenzie, chief executive of The Guild of Property Professionals, said: “Last month saw a bigger decline in house prices than usual for the summer – leaving the average home worth £15,000 less than this time last year.
“The sluggish rate of mortgage approvals throughout the year has caused a significant decrease in the number of first-time buyers getting their foot on the property ladder.
“All eyes will be on the next few months. Demand usually remains high in the autumn, as potential buyers look to get moved in before the festive season.”
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.
Former 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 in March 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. A further stamp duty cut was introduced by Liz Truss in September 2022 before Jeremy Hunt said the cut will end in March 2025.
Since the pandemic began, a lack of affordable homes and rising demand has seen prices skyrocket.
By August 2022, a typical UK property hit a record high cost of £293,992, according to analysis from Halifax.
That proved to be the peak with economic disruption starting to hit the house market shortly after.
The Bank of England has been raising interest rates in recent months in a bid to cap inflation, which had soared beyond 10% until falling to 6.8% more recently.
The disastrous mini-budget from Liz Truss and Kwasi Kwarteng in September 2022 also took its toll.
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 2022 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.
Positive Money’s YouGov poll said 54% 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 2023?
The current economic climate is finally catching up with the housing market.
With no immediate sign of an end to the cost of living crisis and interest rates forecast to rise further, house prices are starting to fall.
But that’s not all good news for people looking to get on the housing ladder.
Rising interest rates mean significant increases in mortgages and that is already deterring people from buying properties.
The BoE reported that there were 49,444 mortgage approvals for house purchases in the UK in July 2023, down almost 10% on the 54,605 mortgages given the greenlight in June and more than 20% lower than July 2022.
Meanwhile, the number of transactions has also fallen, HMRC said. There were 86,190 transactions in July 2023, according to the government body’s non-seasonally adjusted estimate. That’s 22% lower than July 2022 and 9% down on June 2023.
The central bank has been stress testing banks to see if they can weather an economic crisis that could see interest rates hit 6% and inflation reach 17%. Part of that annual stress test also included house prices and the BoE is testing banks’ capabilities to deal with a worst-case scenario of a 31% fall in house prices.
Aside from a brief rise in April, Nationwide has now been reporting house price falls for a year. The latest stats from the building society show prices fell 0.8% in August when compared with July. Overall, prices are 5.3% lower than in August 2022, representing a £14,600 drop in the space of a year.
Robert Gardner, Nationwide’s chief economist, said mortgage rates are the main reason why the housing market has slumped.
“The softening is not surprising, given the extent of the rise in borrowing costs in recent months, which has resulted in activity in the housing market running well below pre-pandemic levels,” said Gardner.
“While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time, especially if mortgage rates moderate once bank rate peaks.”
Halifax joined Nationwide in reporting annual falls in house prices in June, down 2.6% in the year albeit only down 0.1% on May’s prices.
Kim Kinnaird, the director of Halifax Mortgages, said: “How deep or persistent the downturn in house prices will be remains hard to predict. Consumer price inflation is likely to come down in the near term as energy and food prices look set to reverse their steep rises, but core inflation is clearly proving stickier than originally expected.
“With markets now forecasting a peak in bank rate of over 6%, the likelihood is that mortgage rates will remain higher for longer, and the squeeze on household finances will continue to put downward pressure on house prices over the coming year.”
Rightmove’s house price index tracks asking prices when properties come on the market for sale which means it acts as an early indicator of changes in the housing market.
Rightmove reported that asking prices hit a new record high in May, reaching £372,894. That represented a 1.8% rise in a month – the biggest monthly increase the property site has recorded this year so far.
Prices were virtually unmoved in June, down just £82. They reported a marginally bigger drop in July, however, seeing asking prices drop by another 0.2% (a further £905) to £371,907.
Rightmove’s director of property science Tim Bannister said: “We expected some more twists and turns this year and we’ve had several in the last month, including stubbornly high inflation figures, surprisingly large average wage increases, and their eventual impact on mortgage interest rates and availability.”
House prices have risen 0.1% in the last year – the slowest rate since 2012, according to Zoopla.
Zoopla’s executive director Richard Donnell said: “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.”
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