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The housing market is facing challenges due to higher mortgage rates and cost-of-living pressures. This has resulted in weaker demand, fewer sales, and low house price growth. The market is experiencing a slow and drawn-out adjustment process, worsened by seasonal factors.

Market Activity:
Market activity is currently tracking in line with 2019 levels but remains below the levels recorded during the recent pandemic years. Leading indicators for the past four weeks show that demand for homes is 34% lower than the average compared to the same period in the last five years (2018-2022). However, sales agreed have only decreased by 20% as the availability of homes for sale has increased after a period of scarcity. Southern regions are experiencing larger price falls compared to other regions.

House Price Inflation:
Weaker demand, price-sensitive buyers, and fewer sales have led to a rapid slowdown in house price inflation over the past year. The annual UK house price growth is currently at +0.1%, reaching a virtual standstill. This is the lowest growth rate in over 12 years, since August 2012. There is a clear north-south divide in house price inflation, with southern England registering year-on-year price reductions of up to -1%. All other regions and countries in the UK are seeing low single-digit price growth. Scotland is experiencing growth of +1.7%.
Price Changes and Affordability:
The price changes reflect the greater impact of higher mortgage rates on higher-value housing markets. Buyers in southern England require larger mortgages, bigger deposits, and higher incomes to purchase homes. This pricing dynamic is pricing more buyers out of the market, weakening demand, and pushing down prices. In contrast, more affordable markets, particularly Scotland, are holding up better in terms of market activity. This trend is expected to continue throughout 2023 and into 2024.

First-Time Buyers:
The variation in house price growth across the UK is partly explained by the ability of first-time buyers (FTBs) to buy at higher mortgage rates. FTBs account for one-third of annual sales, with most originating from the private rental market. The dynamics of renting and buying impact demand and prices. Low mortgage rates in recent years made buying cheaper than renting, leading many FTBs to opt for 3+ bed homes instead of flats and smaller houses.

However, mortgage rates above 5% have reversed this trend at the national level, making renting 10% cheaper than buying at a UK level. Nevertheless, the experience for FTB buyers varies across the UK, with Scotland and the North East offering mortgage repayments up to 18% lower than rental costs. In contrast, it is more expensive to buy than to rent across all areas of southern England and the Midlands. Higher mortgage rates are pricing more FTBs out of the sales market in southern England, reducing demand and putting downward pressure on house prices. The fact that mortgage lenders require borrowers to afford higher 'mortgage stress rates' further supports the view that price reductions will remain concentrated in southern England.

Sales Completions:
The impact of higher mortgage rates has primarily resulted in lower sales volumes. The market is still on track for 1 million sales completions in 2023, which is 21% lower than 2022 levels and the lowest number since 2012. Cash buyers remain steady, with a projected 1% decline in cash sales compared to 2022. However, mortgaged sales are expected to be 28% lower. Existing homeowners using a mortgage, who typically account for one-third of annual sales, are under less pressure to move and will wait for an improvement in mortgage rates. The economics of new buy-to-let purchases are also being squeezed by higher mortgage rates, resulting in lower investment levels in 2023.

Affordability:
Housing affordability remains the primary barrier to more sales, including the level of house prices and the cost of mortgage repayments. Southern England faces the greatest affordability challenges, with household income required to buy a home remaining high at over £75,000 in many market areas. Higher mortgage rates have increased UK mortgage repayments by 23%, or £216 per month, over the past year. While mortgage rates are expected to fall below 5% later in the year, it will be a gradual process as financial markets reassess the duration of higher interest rates. Affordability is improving relative to earnings as wages rise, with a 7% increase over the past year. Housing affordability, based on a house price to earnings basis, is expected to improve by 9-10% in 2023 due to modest price falls and rising average earnings. The UK house price to earnings ratio is projected to be in line with the 20-year average at the end of 2023, at 6.3x. Affordability has improved the most in London, where the price to earnings ratio will reach single digits for the first time in 11 years. Earnings are expected to continue rising faster than house prices in 2024, further improving affordability, particularly in southern England.

Conclusion:
The property market is facing challenges due to higher mortgage rates, resulting in weaker demand, fewer sales, and low house price growth. Southern England is experiencing larger price falls compared to other regions, primarily due to the impact of higher mortgage rates on higher-value housing markets. First-time buyers are affected by these higher rates, with affordability challenges being greatest in southern England. Sales volumes are projected to decrease in 2023, primarily driven by lower mortgaged sales. However, cash buyers remain steady. The outlook for mortgage rates and affordability is expected to gradually improve, with wages rising faster than house prices. This, together with mortgage rates in the 4-5% range, is expected to support sales volumes in the future.