Navigating through a changing tide in the housing market

Published 2nd September 2022

A changing tide in the housing market is upon us.  We look at how homebuyers are having to navigate their way through higher interest rates and an unstable economic climate and consider is it time for a compromise.

Purchasing a Home Today

The average price of a house in the UK right now is about £281,000, a 12.4% jump in just over 12 months. The rising trend in housing prices in the UK has been made worse by the Covid pandemic as the country emerges from one of its darkest periods in modern times. First time buyers realise that it has never been more expensive to buy a house, and the problem seems to be getting worse with interest rates on the rise. To understand the likely causes of this trend, it is important to first look at the process of purchasing a home.

When buying a home, most buyers need external financing through mortgage facilities. Mortgage lenders usually require a deposit and a surety that the borrower can afford the monthly repayments; lenders appraise the borrower’s income as a screening measure. A few years ago, borrowers could borrow the full amount required to buy a house, and a few years before that, a borrower could borrow an amount above the asking price for a home.

However, today it is rare to come by such an offer. For many institutions, mortgage rates depend on the initial deposit; the higher the initial deposit, the lower the interest. This means it requires a significant amount of money to step onto the first rung of the property ladder. First-time home buyers must contend with an unstable economy and runaway house prices before purchasing their first home, while current home buyers face increasing costs such as a higher conveyancing quote.

The Curious Case of Affordability

With all the uncertainty surrounding the property market, the most prevalent advice to potential first time buyers is to cut their expenses, save up and put an initial deposit on an average house. However, this poses the question, can the average income earner buy the average home? What is the income required to afford monthly repayments, and what is the affordability of the options available?

The Office for National Statistics shows that the average income in the UK is about £32,000 a year. For the average house at 281,000, a minimum deposit of 5% is required, which is about £14,050. For a 25-year mortgage, the bank can lend you an average of £143,680 with an average monthly repayment of £7300. This is way below the amount needed to purchase the home, so the average person cannot afford to buy the average home.

What Does Lifestyle Have to Do with House Prices?

Next comes the question of compromising; home ownership is ingrained in the culture of the English people, so much so that many first-time buyers already have high expectations of joining the property ladder. This is despite the fact that inflation has eroded the value of the pound, and most buyers may have to start lower than they are willing. Furthermore, making the move from a rented property is very challenging since, more often than not, the rental payments outweigh monthly mortgage repayments.

Unsustainable Wage Growth

The Halifax House Price Index shows that although wages have steadily increased since 2005, inflation has pushed prices of most commodities higher such that real growth has been minimal for average households. Furthermore, house prices have grown faster than real income, which makes it even harder for first-time buyers.

The chain reaction caused by expensive houses and low wages has a widespread effect on the entire housing market as there are fewer buyers at every step of the property ladder. For instance, conveyancers in London are witnessing an uphill task for estate agents selling a house in an area where the average price of a home is £530,000.

A New Era

Oddly enough, first-time buyers grew in 2021 to a record high of 409,370. Despite the harsh economic conditions and exorbitant house prices, there seems to be more first-time buyers. So why is this? The best explanation is that the first-time buyer is changing with the times. Currently, the average age of a first-time buyer is around 32 years old, about 3 years older than a decade ago. They have more established careers and access to income. So, perhaps the biggest compromise when buying a home in 2022 is age. Other glaring compromises include location since urban areas attract the highest prices. More first-time buyers must weigh between must-haves like proximity to schools and would-be nice-to-have scenarios like designer fittings.

Is the Market Overheating?

Many experts view this apparent increase in demand for housing in the backdrop of a cost of living crisis and rising inflation as a warning sign of a potential crash in the housing market. The main concern, at least for the government, is to tame rising house prices by making them affordable using measures such as scrapping the affordability test. Still, the housing market continues to respond to inflation, and the government may be unable to adjust interest rates to curb inflation since the rates are already low.

Adjusting the Rear View Mirror

Over the years, various administrations have mastered the art of sealing cracks in the housing market, elevating demand rather than focusing more on the supply side. Years of cheap credit, stamp duty holidays, and the recent move to scrap the affordability test have all been geared to ramp up demand for housing. All the signs point to a need for an overhaul in the housing market to create lasting solutions and include more people on the property ladder affordably.