Today
The easy money era is receding, with mortgage rates projected to stabilise at higher levels than in recent years. Against this background, it seems likely that cash purchases will account for a larger portion of - what will almost certainly be - an overall lower number of home sales.
These trends are already apparent in the market. Mortgaged households are sitting tight, but buyers with cash are on the move. So far this year, 58% of purchases by existing property owners were made without a mortgage, a rise from 55% in 2022 and 53% in 2021.
Tomorrow
Downsizers and investors will be the groups to watch. The current slowdown in transactions is creating a more favourable environment for downsizers, who typically prefer to secure their next purchase before selling their current home. This was a challenging prospect in the fast-paced markets of 2021 and 2022. Investors meanwhile, faced with fast-reducing profits, are increasingly likely to find that they can only make their sums stack up by using cash.
The rising cost of maintaining a larger home and servicing the final years of a mortgage has increasingly tempted many to downsize at an earlier stage. A record 71% of downsizers have paid for their new home in cash this year, against 62% in 2022. At the same time, 59% of buy-to-let purchases this year have been made without a mortgage as investors try to make the sums add up.
"A new rung in the ladder"
Today
Over the past decade, falling interest rates and the increased availability of small deposit mortgages have allowed first-time buyers to purchase larger homes. As a result, the prices of flats have fallen behind, recording 14% less price growth than houses between 2019 and 2023.
But now, in response to higher interest rates, first-time buyers are increasingly opting for smaller homes to gain a foothold on the property ladder. In London, 37% of the homes bought by first-time buyers had three or more bedrooms - the lowest proportion on record.
Tomorrow
The increasing cost of trading up means that only those with substantial savings are likely to be able to seek out more space. The resulting decline in the competition for larger homes may cause their prices to stall. We expect the prices of smaller and more affordable homes to hold up more strongly.
There is already evidence of increased demand for such properties in some areas, with the prices of flats outperforming terraced homes in 7% of local authorities across Great Britain (up from 0% last year).
Ultimately, this is likely to restore some of the missing rungs in the housing ladder, with younger homeowners taking smaller steps while building up equity, rather than giant leaps.
"The chosen few"
Today
In most parts of Great Britain, the proportion of households that own their home outright is higher than any other tenure type - mortgaged or renting. In the late 1980s, about 40% of households had a mortgage, today it is about 30%.
This explains why the Bank of England's scope to cool inflation through higher mortgage rates has so far been fairly limited. Moreover, approximately three-quarters of mortgaged households are now on fixed-rate deals and so yet to feel the full impact of higher rates.
Tomorrow
As higher rates start to hit more of these mortgaged households, their mortgage payments will substantially increase. To cope with the extra burden, they should be able to temporarily switch to interest-only payments or extend the term of their mortgage.
As more households take up these options, there will be increasingly fewer households that are mortgage-free in later life, especially as more first-time buyers are extending their mortgage terms to keep payments low.
"Rent review"
Today
Higher rates mean higher costs all around. Over the past decade, house price growth has largely outpaced rental growth - the average price rose by 70% while rents increased by 46%. However, this trend is starting to reverse. Higher mortgage rates have slowed price growth from a high of 12% in September 2022 to just 5% in April 2023. Over the same period, annual rental growth jumped from 7% to 11%, driven by a shortage of available homes and landlords passing on their increased costs to tenants.
Tomorrow
However, persistent inflation is stretching household budgets and this is likely to temper rental growth in the short term. We expect rental growth to cool to around 5% by the end of this year - and another rise of 5% in 2024. But it's possible that rents may outpace this if interest rates remain elevated for longer, compelling landlords to accept higher-cost remortgage deals.
House price growth, meanwhile, is likely to continue slowing, and higher mortgage rates are likely to keep a lid on price growth over the next few years.
