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 have been hitting record levels in the last 18 months but the cost of living crisis and rising interest rates have finally started to catch up with the housing market.
But the affordability gap is still seeing people who want to get on the housing ladder and buy a home left disappointed.
Average prices reached record levels in England, Wales and Scotland in 2022, according to the Office for National Statistics (ONS).
The average UK house price, measured against final transaction prices, was £294,000 in December 2022, the ONS found, down from £296,000 in November.
“A combination of economic turbulence, increasing mortgage rates and a squeeze on household finances has been the perfect recipe for a reduction in the rate of house price growth and that’s what we’ve seen since the closing stages of last year,” said Marc von Grundherr, director of London estate agents Benham and Reeves.
“When you also couple these factors with the usual seasonal slowdown that hits the market during December, it would have been more of a surprise had house prices continued to climb.
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“However, what’s important to note is that the rate of decline has been far more marginal than many predicted and this should stand the property market in very good stead for the year ahead.” But house prices remain out of reach for many. ONS’s latest statistics show prices cost £100,000 more than in December 2012 and a staggering £26,000 higher than in December 2021.
The ONS found the cost of a home was almost nine times the average annual disposable household income as of March 2021 compared to six times in Wales and 5.5 times in Scotland.
That means housing affordability in England is at the worst levels since the ONS started recording figures back in 1999, when a house cost 4.4 times average earnings.
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.
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 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 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 mortgage approvals for house purchases fell for the fourth straight month in December, down to 35,600 from 46,200 in November and reaching the lowest point since the first Covid lockdown in May 2020.
The BoE has been 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.
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.
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 households would see mortgages accounting for 5 per cent more of their net household income. Around two 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.”
By January 2023, Nationwide reported a fifth consecutive month of house price falls.
The building society reported the average property price was £258,297 – 3.2 per cent down on its August 2022 peak.
Strong economic headwinds mean house prices are set to continue to fall, Nationwide’s chief economist Robert Gardner said, but that doesn’t necessarily mean more people can buy a home.
“The overall affordability situation looks set to remain challenging in the near term,” added Gardner. “Saving for a deposit is proving a struggle for many given the rising cost of living, especially those in the private rented sector where rents have been rising at their strongest pace on record.”
Zoopla’s executive director Richard Donnell said the housing market would see a “slow start” in 2023 before predicting it would “pick up” later in the year as mortgage rates settle down.
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.
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