There is also a great disparity in affordability around England. An average priced home in the North East costs the equivalent of 12 years of income for a low-income household whereas in London it is the same as 40 years of income.
In recent months major property sites Zoopla and Rightmove and the UK’s biggest mortgage providers Halifax and Nationwide have repeatedly reported record rises.
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It’s down to a lack of homes to meet demand, according to Iain McKenzie, chief executive of The Guild of Property Professionals – a national network of 800 independent estate agents.
“At a time when there is so much doom and gloom in the news, we might expect a much greater cooling effect on house prices than what these figures are showing,” said McKenzie.
“The ‘mini-Budget’ has caused shockwaves throughout the economy and intervention by the Bank of England to counter these effects has resulted in lenders pulling many fixed-rate mortgage deals.
“While the current economic crisis is likely to impact mortgage rates, a sudden crash in the market is not as likely as some economists are forecasting.
“Estate agents are still seeing stock shortages in many areas of the country, something which has supported elevated house prices throughout the boom. The government’s stamp duty cut may well have the effect of mitigating spiking finance costs, but question marks remain over how high interest rates will climb.”
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. A further stamp duty cut was introduced by Liz Truss in September 2022.
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.
A typical UK property costs a record £293,835 as of September, according to analysis from Halifax.
The price rose 0.4 per cent in August but growth is starting to slow, according to Kim Kinnaird, director of Halifax Mortgages, with prices falling 0.1 per cent on average in the following month, albeit almost 10 per cent higher than the year before.
The downturn followed surging mortgage rates and the rising cost of living.
“The events of the last few weeks have led to greater economic uncertainty, however in reality house prices have been largely flat since June, up by around £250,” said Kinnaird, director of Halifax Mortgages.
“This compares to a rise of more than £10,000 during the previous quarter, suggesting the housing market may have already entered a more sustained period of slower growth.”
There has now been a full year of consecutive house price rises, according to Nationwide.
The mortgage lender reported a 12th straight monthly rise in July with prices up 11 per cent year-on-year.
That became 13 months in August, although price growth slowed to 10 per cent.
Growth continued to slow in September with house prices up 9.5 per cent – the first time rises were in single digits since October 2021.
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Interest rates are also likely to have a big impact on mortgage payments which could see a knock-on effect on house prices.
The Bank of England raised interest rates to 3 per cent in November as inflation soared beyond 10 per cent.
Rightmove’s property expert Tim Bannister said high interest rates are likely to deter first-time buyers from entering the market.
“The era of historically low interest rates looks to be over, which is making it more challenging for those new first-time buyers who are stretching themselves financially to try and get out of the frenzied rental market and onto the housing ladder,” said Bannister.
Months of interest rate rises have already seen the demand that has been driving surging house prices start to reduce and could see more people think twice about buying a home in the future.
Bannister added: “We were already seeing activity soften in the market since the start of the summer as rising interest rates and the cost of living combined to make it more expensive to move.
“Along with the political uncertainty, the sharp rise in rates has had an impact on people’s plans and demand for homes, and a number of people are choosing to wait and see what unfolds over the next few weeks and months.”
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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.
Positive Money’s YouGov poll 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.”
Is a house price crash coming?
The current economic climate is finally catching up with the housing market.
The cost of living crisis is likely to hit households’ ability to move home while rising inflation has seen the Bank of England (BoE) increase interest rates to counter the issue, driving up the cost of mortgages.
The Bank of England is stress testing banks to see if they can weather an economic crisis that could see interest rates hit 6 per cent and inflation reach 17 per cent. 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 per cent fall in house prices.
The move comes amid economic shockwaves following the Liz Truss’ government’s mini-budget. The announcement of tax cuts sent the pound plunging and caused mortgage providers to remove products from the market to reprice them.
“Last month we wrote this is getting scary,” said housing market expert at Built Place Neal Hudson in his latest analysis. “Since the mini-budget, it has turned terrifying.
“Even a full reversal would leave a long lasting impact on the mortgage and housing markets.”
Experts from Lloyds Banking Group predicted that house prices will fall by almost 8 per cent in 2023 and in what the bank describes as a “worst-case scenario” could even plummet as much as 18 per cent.
The bank forecasted that higher interest rates and the wider economic downturn will see mortgage lending slowdown.
Lloyds’ chief financial officer, William Chalmers, said: “So far at least, our customers are proving to be resilient and adapting well to the cost-of-living increases that we have seen.”
Think tank Resolution Foundation predicted over five million families would see their annual mortgage payments rise by an average of £5,100 between October 2022 and the end of 2024. That is collectively £26bn a year more overall.
The research, published before chancellor Jeremy Hunt announced a swathe of U-turns following the mini-budget, found 3.8 million mortgagor households would see mortgages accounting for 5 per cent more of their net household income. Around 2 million households will lose 10 per cent of their household income as a result of mortgage rate rises.
Lindsay Judge, research director at the Resolution Foundation, said: “The living standards pain from rising interest rates will be widespread.”
The first signs of house prices starting to fall in 2022 arrived in July when Halifax reported a 0.1 per cent drop in average prices.
That meant prices only dropped by a tiny amount – a miserly £365 – but it put to an end a year of consecutive rises on Halifax’s house price index. However, growth returned in August, albeit at just 0.4 per cent.
A further 0.1 per cent drop in September showed a downturn is starting to take hold, according to Halifax’s Kinnaird.
“Predicting what happens next means making sense of the many variables now at play, and the housing market has consistently defied expectations in recent times,” she said.
“While stamp duty cuts, the short supply of homes for sale and a strong labour market all support house prices, the prospect of interest rates continuing to rise sharply amid the cost of living squeeze, plus the impact in recent weeks of higher mortgage borrowing costs on affordability, are likely to exert more significant downward pressure on house prices in the months ahead.”
Nationwide reported that house prices fell for the first time from month-on-month since July 2021 in October.
The building society found prices fell 0.9 per cent month-on-month after taking account of season effects, representing the largest fall since June 2020.
Nationwide’s chief economist Gardner said: “The market has undoubtedly been impacted by the turmoil following the mini-budget, which led to a sharp rise in market interest rates. Higher borrowing costs have added to stretched housing affordability at a time when household finances are already under pressure from high inflation.”
Gardner added that the housing market will slow in the months ahead.
He said: “Inflation will remain high for some time yet and Bank Rate is likely to rise further as the Bank of England seeks to ensure demand in the economy slows to relieve domestic price pressures.
“The outlook is extremely uncertain, and much will depend on how the broader economy performs, but a relatively soft landing is still possible.”
Rightmove’s analysis also showed the first 1.3 per cent drop in July 2022, with asking prices down by £4,795. However, unlike Halifax, the property site blamed holidays rather than interest rate rises.
The property site’s figures since then have shown slight increase, the latest in October was 0.9 per cent rise with the latest average price on Rightmove at £371,158.
The fallout from the government’s mini-budget has continued to disrupt the mortgage market. Rightmove’s Tim Bannister said the uncertainty is making it difficult to predict what will happen in the next year.
“What’s going to happen to house prices is understandably on the minds of many home-movers right now, especially following the market uncertainty after the government’s mini-budget,” said Bannister.
“Some aspiring first-time buyers will have had their plans dashed by the sudden nature of the mortgage rate rises, and now face a difficult situation with rents also rising, and a shortage of available homes to rent. Buyer demand was already starting to soften and higher interest rates were anticipated, but they’ve been brought forward sharply due to market uncertainties.”
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Zoopla’s Richard Donnell said that, while house prices have remained resilient while the cost of living crisis has started to bite, higher mortgage rates are set to send prices falling.
The property site predicted double-digit price falls if mortgage rates remain at over 6 per cent. But that would mainly wipe out some of the house price rises experienced during the pandemic while leaving a few negative equity cases.
However, it is more likely that house prices will fall by up to 5 per cent in 2023 with mortgage rates falling to 4 per cent, according to the property site’s analysis.
Donnell, Zoopla’s executive director, said: “A surge in home values over the pandemic and the rise of mortgage rates means we face a sizable hit to household buying power over the rest of 2022 and into 2023.”