Analysis of the latest Office for National Statistics data, which run to April 2023, reveals that average flats in the capital rose in value by 2% year on year, double the average 1% growth for houses. The last time London flat values rose more than house values was in October 2016; since then, the city’s houses have performed best.
This is partly due to the housing cycle. From the mid 2010s, price growth began to ripple out from central London to the suburbs, where homes tend to be larger. However, both cladding issues in the wake of the 2017 Grenfell Tower tragedy and the Covid race for space also subdued the demand for flats and dramatically boosted the value of larger homes.
As a consequence of these factors, the average price of a flat in the capital has increased by just 3% since late 2016, while terraced houses have seen price growth of 18%.
Now, however, the rapid rise in mortgage rates has significantly affected what buyers can afford and purchasers reliant on loans are trading down their aspirations and opting for smaller homes. This is particularly the case for first-time buyers, who were previously leapfrogging flats and going straight for houses as their first homes.
The reversal of this trend has boosted demand for flats and made them more resilient to price falls – and we expect this pattern to continue over the next year or so as households adapt to an era of higher interest rates.
The effect of higher mortgage rates on buyers’ affordability is profound. The average London first-time buyer purchasing a flat with a 25% deposit is now paying just over £2,000 a month for their mortgage (if they have a two-year fixed-rate loan). This is the same as they would have spent on mortgage payments for a terraced house in June 2022, when rates were lower. Meanwhile, back in February 2022, that monthly mortgage payment of just over £2,000 could have afforded them a semi-detached house.
Flat values have outperformed terraced house values in 13 London boroughs over the last year . The trend is most pronounced in the capital’s cheaper boroughs – the best performing flats are in Tower Hamlets, having risen an average of 10.1% year on year, far outpacing the 5.8% growth for terraced homes. Newham has seen a 3% difference in price growth between flats and terraced houses, while Greenwich, Ealing and Barking & Dagenham have all seen flat values rise 2% more than terraced houses.