Buyers are starting to return to the housing market after the summer lull - but they'll need an extra £18,200 to keep mortgage payments flat, according to Zoopla’s latest House Price Index.
Mortgage rates peaked at close to 5% in April and this has led to more home buyers waiting on the sidelines over the summer months. Sales agreed are still down by 6% versus last year but the gap is starting to close.
House price growth has stepped lower and now sits at 0.9% in the year to July - down from 1.3% last month - as fewer sales and affordability pressures limit price growth.
Prices are flat to falling across most Southern regions in England, where declines range from -0.3% in the South East to -1% in London, where buyers are most exposed to higher borrowing costs. On the other hand, prices continue to rise across most of the North and Midlands (1.7% in Yorkshire - 3.1% in the North West, while Northern Ireland sees the highest year-on-year increase at 5.4%.
Buying power 9% lower since January as higher mortgage rates impact activity
Average five-year fixed mortgage rates have risen from below 4% in January to around 4.8% today. For a buyer who could previously afford a £200,000 mortgage, that rate rise means they can now only borrow around £182,000 for the same monthly payment - a 9% reduction in how much they can borrow.
In the face of reduced buying power, home buyers can choose to: wait for rates to move lower, look to buy cheaper homes, accept paying more on their mortgage repayments or put down a larger deposit to reduce the impact. Zoopla says many have decided to wait over the summer with fewer sales agreed compared to last year.
The average home buyer would need to add an additional £18,200 to their deposit on a home purchase to keep the monthly mortgage repayments unchanged compared to the start of the year. This varies between regions, reflecting the variation in house prices - buyers in London would need to add almost double the national average to their deposit (£35,500) while lower house prices mean those in the North East would only need an additional £10,200.
Buyers returning to market despite decrease in power
Despite reduced buying power, mortgage rates have stabilised and there has been a clear and sustained increase in the number of people searching for homes on Zoopla which is up 7% year-on-year - the highest increase since mortgage rates jumped in the spring.
Importantly, searching for homes is higher across every region and country for the first time in a year. The pick up in searching activity is strongest in the South East (+8.9%) and East of England (+8.5%), while the North West (+0.7%) has seen the lowest increase.
The increase in property searches is an early sign that buyers are considering their options. This activity will take time to feed into more buyer enquiries and sales agreed in the coming weeks, although Zoopla says "it’s clear that the gap to last year in sales and buyer demand is starting to close".
Buyers have plenty of homes to choose from. The number of homes being newly listed for sale is close to last year and shows that serious sellers are starting to return to the market, many of whom are also buyers. In terms of the overall stock of homes for sale this is 5% higher than a year ago - this extra choice will ensure house price inflation remains held in check as buyers can make competitive offers.
Richard Donnell, executive director at Zoopla, commented: “Many buyers have taken a ‘wait and see’ approach over the summer months in response to higher borrowing costs and political uncertainty. The low point for activity was mid July around the time of the World Cup final. Since then we have seen a steady increase in the number of people searching for a home, assessing their options ahead of the post holiday rebound in sales market activity. This is a nationwide trend and the first time searches for homes are up across Britain this year.
Average mortgage rates have stabilised but remain closer to 5% than 4% meaning affordability remains an important factor for many home buyers choosing their next home. Buyers have plenty of choice this autumn and will be able to make competitive bids for homes. Motivated sellers need to price carefully to attract interest and bids and seek the advice of local agents for the likely levels of demand and interest in their home as market conditions vary widely across the country.”
Jeremy Leaf, north London estate agent and former RICS residential chairman, said: “We are starting to see holiday returnees slowly drifting back but the market is not what it was just a few months ago.
“On the ground, modest rises in mortgage costs have reinforced the buyer’s hand and are resulting in lower offers, particularly for flats, many of which have remained unsold for some time. On the other hand, only relatively few sellers are recognising the new realities and negotiating as hard as they can to try to agree terms at what they regard as realistic.
“We know too, that listings will increase over the next few weeks bearing in mind a recent rise in appraisals which will further strengthen buying power.
“Looking forward, we don’t anticipate much change as speculation about potential Budget tax increases intensifies.”
Nathan Emerson, CEO at Propertymark, added: “These figures suggest buyers are beginning to re-engage with the housing market after a quieter summer, with searches up across every region. But renewed interest should not be mistaken for a full recovery in transactions just yet.
“Affordability remains the key constraint. Higher mortgage rates are reducing buying power, while the additional £18,200 deposit needed to maintain repayments highlights the particular challenge facing first-time buyers.
“More homes available for sale is positive, giving buyers greater choice and helping keep price growth in check. But the regional picture remains mixed, reinforcing that the housing market is not one-size-fits-all.
“Local expertise will be crucial this autumn, helping buyers understand what they can realistically afford and ensuring sellers price their homes appropriately. The return of demand is encouraging, but affordability remains the biggest barrier to a sustainable recovery.”
