There has been a rapid slow down in house price inflation over the last year, according to our House Price Index.
Weaker demand, more price sensitive buyers and fewer sales have caused house price growth to reach a virtual standstill, with prices rising just +0.1% since August 2022.
That’s the lowest rate of annual growth seen since August 2012.
What can you buy for £265,100: the new national average house price?
There is a clear north-south divide in house price inflation, with the south undergoing price reductions of -1%, while the north is seeing growth of up to 1.7% in Scotland.
Southern England hit hardest with house price falls
Why are house prices going down in the south and up in the north?
More expensive homes, like those found in the south, need bigger mortgages to buy them.
Higher mortgage rates are therefore having a greater impact on buyers in the south, as they’ll need to save bigger deposits and earn higher incomes in order to buy a home.
Buyers are now effectively being priced out of the market in the south - and this weakening demand is pushing down house prices.
On the other hand, the more affordable markets in the north - and in particular Scotland - are holding up, as property prices are less expensive here and buyers don’t need to take out such big mortgages to buy them.
This north/south split in property prices is set to continue throughout the rest of 2023 and into 2024.
How first-time buyers help property prices to stay buoyant
In areas where first-time buyers (FTBs) can still afford to purchase a home, property prices are holding up.
One in every three homes sold in the UK is bought by first-time buyers, most of whom are moving out of the private rental market.
In recent years, ultra low mortgage rates meant monthly mortgage repayments worked out much cheaper than monthly rental payments.
This supported demand and led many FTBs to buy 3+ bedroom homes, bypassing the market for flats and smaller houses.
Today, with mortgage rates over 5%, this trend has now been reversed at a national level, making renting, on average, 10% cheaper than buying. This is despite the high growth in rents over recent years.
That said, buying is still cheaper than renting in Scotland, the North East, North West, Northern Ireland, Yorkshire & The Humber and Wales.
If a renter were to buy the home they rent with an 85% loan-to-value mortgage (using a 30-year term and paying a 5.6% mortgage rate) they would find it cheaper to buy than rent in these regions.
In fact in Scotland and the North-East, average mortgage repayments are up to 18% lower than rental costs.
This saving for first-time buyers supports access to the housing market and demand for homes.
However in the south of England, the reverse is true.
Where is it cheaper to buy than to rent?
Buying costs are higher than renting costs across all areas of the south - and up to 24% higher in London.
This means more FTBs are priced out of the sales market, increasing demand for rented homes.
When stress testing by mortgage lenders is taken into account, the actual position is worse for all FTBs.
Mortgage lenders require new borrowers to be able to afford higher mortgage ‘stress rates’ of closer to 8.5%, rather than the product rate of 5.6% used in this analysis.
Therefore demand will be weaker and price reductions concentrated across southern England where affordability challenges are greatest.
One thing that might help FTBs is the increased number of ex-rental properties that are coming to market as landlords continue to sell their properties.
Ex-rental homes are usually priced 25% lower than similar homes on the wider market and are often more accessible to FTBs.
When will housing affordability improve for buyers in the south?
Housing affordability remains the primary barrier for buyers, whether because of the level of house prices or the cost of mortgage repayments.
The challenge is the greatest in southern England, where the household income needed to buy a home is over £75,000 in many market areas.
Higher mortgage rates over the last year have increased the monthly mortgage repayments for an average-priced home by £216 - a 23% increase.
Mortgage rates are now starting to drift lower but still remain over 5%.
We do expect them to fall below 5% later this year but it looks set to be a drawn-out process.
Mortgage rates all hinge on the financial markets, as they re-evaluate how much longer interest rates need to remain high to bring inflation back under control.
We expect lower mortgage rates to support more sales later this year and into 2024.