"How mortgage rates evolve will be crucial, as affordability pressures were the key factor holding back housing market activity in 2023"
- Robert Gardner - Nationwide
UK house prices rose by 0.7% month on month in January, raising the price of a typical home in the UK to £257,656 from December's £257,443.
Robert Gardner, Nationwide's Chief Economist, comments: “UK house prices rose by 0.7% in January, after taking account of seasonal effects. This resulted in an improvement in the annual rate of house price growth from -1.8% in December to -0.2% in January, the strongest outturn since January 2023.
Affordability pressures begin to ease
“There have been some encouraging signs for potential buyers recently with mortgage rates continuing to trend down. This follows a shift in view amongst investors around the future path of Bank Rate, with investors becoming more optimistic that the Bank of England will lower rates in the years ahead.
“These shifts are important as this led to a decline in the longer-term interest rates (swap rates) that underpin mortgage pricing around the turn of the year.
However, the partial reversal in recent weeks in response to stronger-than-expected inflation and activity data cautions that the interest rate outlook remains highly uncertain.
“While a rapid rebound in activity or house prices in 2024 appears unlikely, the outlook is looking a little more positive. The most recent RICS survey suggests the decline in new buyer enquiries has halted, while there are tentative signs of a pickup in the number of properties coming onto the market.
“How mortgage rates evolve will be crucial, as affordability pressures were the key factor holding back housing market activity in 2023. Indeed, at the end of 2023, a borrower earning the average UK income and buying a typical first-time buyer property with a 20% deposit had a monthly mortgage payment equivalent to 38% of take-home pay – well above the long-run average of 30%.
"If average mortgage rates were to trend down to 4%, this would ease the mortgage payments burden to 34% of take-home pay (assuming house prices and earnings are unchanged).
"However, other things equal, mortgage rates of 3% (still well above the lows seen in the wake of the pandemic) would be needed to bring this measure of affordability back towards its long-run average.
Deposit burden remains significant
“Raising a deposit also remains a major challenge for those wanting to buy, with a 20% deposit on a typical first-time buyer home equating to c.105% of average annual gross income – down from the all-time high of 116% recorded in 2022, but still close to the pre-financial crisis level of 108%.
This reflects that house prices are still very high relative to earnings, with the house price-to-earnings ratio standing at 5.2 at the end of 2023, well above the long-run average of 3.9.
“This helps to explain why the proportion of first-time buyers drawing on help from friends and family or an inheritance to help raise a deposit has increased from already elevated levels.
In 2022/23, nearly half of first-time buyers had some help raising a deposit, either in the form of a gift or loan from family or friends or through inheritance – up from 27% in the mid-1990s.
A mixed picture across the UK
“There remains considerable variation in affordability across the country, with pressures particularly acute in London, the south of England and East Anglia. Scotland and the North continue to be the most affordable regions, with mortgage payments as a share of take-home pay much closer to their long-run average.
“These variations have led to stark differences emerging between those who would like to buy and those who are actually able to do so. This is most pronounced in London, where the average income of actual first-time buyers (for a single borrower) is around 55% higher than the average income in the capital (for an adult full-time worker)
“Similarly, in the South East and East of England, the average income of actual first-time buyers is around 25% above the average income in these regions.
"However, in parts of the UK where affordability is less stretched, such as Yorkshire & The Humber and the North East, we find that incomes of actual first-time buyers are broadly similar to average regional incomes. Moreover, in Northern Ireland and Scotland, the average income of first-time buyers is actually slightly lower than average incomes in those regions.”
Tom Bill, head of UK residential research at Knight Frank, said: “UK house price declines are bottoming out as the economic news improves. Inflation has fallen faster than predicted, which means financial markets believe rates will drop by a full percentage point in 2024.
"Whatever the Bank of England decides to do, mortgage lenders set their rates based on these lower expectations, which is increasing demand. Mortgage approvals are creeping up and we expect UK house prices to rise by 3% this year. A general election later rather than sooner would allow more momentum to build.”
Nathan Emerson, CEO of Propertymark, comments: “The reported month-on-month increase in house prices will start to encourage homeowners to feel more confident that they can potentially make their next move. 2024 seems to be starting off more positive for the housing market, and let’s hope that trend continues.
"If the Bank of England decides to bring down interest rates too, this should give sellers even more confidence and ease the pressure on affordability. Hopefully, this is the start of a period of economic recovery for the nation.”
Sam Mitchell, CEO of Purplebricks, said: “Confidence is returning to the housing market and we have seen the number of buyers, viewings and offers all increase dramatically through January as banks continue to actively compete on rates. With the general election likely to take place later in the year than originally anticipated, there is enough certainty to prolong this strong start to 2024.
“With the number of homes coming to the market up just 2% year on year, competition for properties is building. It’s more of a sellers’ market now than we’ve seen since the Truss budget in 2022. Assuming inflation continues to slow, we expect this upward trajectory in the market to continue until we enter the political uncertainty that inevitably comes with an election.”