What do higher rates mean for buyers and sellers?
Green shoots were emerging in the property market, but higher mortgage rates have, once again, caused a pause in the recovery.Over the past six months, house prices have held up fairly well. It is likely that, by the end of the year, the Land Registry will report that annual growth across Great Britain has slowed to just below 0%.
Transactions will be harder hit, as households sit tight amid economic uncertainty. There has been a drop in the number of people moving to the next step on the ladder, thanks to higher mortgage rates. But first-time buyers have been more resilient than expected.
The number of cash-rich homeowners, who are close to paying off their mortgage or have already done so, has sheltered the market from significant price falls and will continue to do so. Cash buyers accounted for 34% of sales so far this year - a seven-year high.
If mortgage rates remain above 6%, this will put extra pressure on affordability, increasing the chance of small price falls. For the moment, the fall-out from the rise in rates has been modest. The number of mortgaged households on long-term fixed-rate deals will provide support to the market.
We do not expect to see a significant rise in repossessions, which were a key catalyst for price falls in 2008 as the supply of properties coming onto the market surged.
With the expectation that rates may fall next year, we think households are more likely to delay moves. Mortgaged households, in particular, with no requirement to relocate, are likely to stay put delay rates begin to decline. However, opportunistic cash buyers are likely to be more active.
Cheaper and smaller homes in more affordable areas are proving the most resilient. This reflects the impact of higher mortgage rates on the amount that people can borrow. But cash-rich older generations will be on the hunt for smaller properties. This is already playing out in London: in April the prices of flats rose more rapidly than those of terraced houses for the first time since October 2017. And this trend is beginning to play out across the country.
Financial markets are increasingly of the view that interest rates will stay higher for longer. This is likely to bear down on future price growth into 2024 and potentially 2025.
That said, it is highly likely that mortgage rates will be lower in 2024 than in 2023, which should spark some growth in the market. Where rates settle in the long term will be the key determinant.
How will the higher interest rate world affect different households?
First-time buyers:
The resilience of first-time buyers has been the biggest surprise so far this year. Despite being hit by a cocktail of rising rents, high house prices and mortgage rates, first-time buyers made up 27.3% of all buyers in Great Britain so far in 2023. This is a record high.UK Finance statistics show that the average first-time buyer who climbed onto the ladder this year spends 21% of household income on mortgage payments, against 17% during the same period of 2022.
To combat higher rates, first-time buyers are putting down bigger deposits, particularly in the South of England where homes are more expensive. This highlights how the Bank of Mum & Dad and inherited cash are playing an even larger role, restricting homeownership to the wealthiest - and to those whose parents and grandparents are likely to be mortgage-free homeowners who can help.
First-time buyers are also purchasing smaller homes to circumvent the affordability squeeze. This has supported flat values, helping reverse a key post-Covid trend.
While mortgage rates remain at around 6%, buying will be considerably more expensive than renting. The average first-time buyer purchasing a home in Great Britain with a 10% deposit will face monthly mortgage payments of £1,372. This is £114 more each month than the cost of renting. In order to be better off buying, they would require a deposit of 18%. Even if prices fell by 5%, it would still be £46 a month cheaper to rent.
This gap between the cost of buying and the cost of renting is widest in the South of England. The average first-time buyer purchasing in the East of England, for example, would be £553 a month better off renting.
This is likely to weigh down on the number of people buying a first home. Nevertheless, the desire to get onto the housing ladder should not be underestimated because of the opportunity it provides to build up equity in the long term. This factor and the projected drop-off in the number of people trading up mean that we expect first-time buyers to continue making up more than a quarter of all buyers.
Upsizers:
Trading up has become increasingly costly. Since the beginning of 2019, the average price of a flat in Great Britain has risen by 12%, but the price of a detached home has increased by 27%. Trading up from the typical semi-detached house to a detached property costs an extra £209,000 on average. This is four times as much as it did in 2019 when such a move would set you back £48,000.Higher rates have aggravated the problem: borrowing more to bridge the gap is increasingly expensive. There may be a greater choice of properties as older generations sell up to downsize. But it is likely that upsizing will be reserved for those with the most cash or equity.
As a result, most would-be upsizers will stay put, although those who desperately need extra space may compromise, opting to move to a more affordable area. This explains why 26% of households moved to a more affordable area in Q2 2023, up from 19% during the same quarter last year.
Consequently, the numbers leaving cities are likely to remain strong over the next 12-18 months. But the secondary suburban and commuterville areas - rather than the prime pockets of suburbia – will benefit most from this trend.
Downsizers:
There has been little downsizing activity in recent years, partly as a consequence of the pandemic. But in 2023, higher energy costs and mortgage rates are proving to be a catalyst to relocation in this part of the market.Our data reveals that 41% of all households making a move are reducing their bedroom count this year, up from 32% in 2022 and 33% in 2019. This increase is the sharpest we have seen since we began tracking these figures in 2016.
A growing number of younger downsizers are choosing to move to pay off their mortgage a few years before the end of its term. Highlighting this trend is the record-breaking number of downsizers - 71% to date this year - who paid cash for their new home. In 2022 and 2019, the numbers were 62% and 60% respectively.
Downsizers tend to be less sensitive to falling prices, having accumulated equity over the decades. As a result, we expect older generations to play an even bigger role in the market for the rest of 2023. We also expect that they will be passing on some of this cash to Gen Z and millennials to help these groups achieve their homeownership dreams.
