MHHG estate agents

The sales market continues to experience a smooth and gradual recovery. There is a sustained increase in demand and growth in the number of new sales agreements. Although house price inflation is slowing down, the likelihood of a major price re-correction remains very low.

Following the Easter break, demand for homes reached its peak this year and is currently 14% higher than 2019 levels. However, it is still 42% lower compared to the same time last year. The stock of homes available for sale continues to expand, now standing at 66% higher than a year ago. This increased availability of homes is providing more choices for buyers, resulting in a 6% increase in new sales agreements compared to 2019, aligning with the 5-year average. The market remains on track for achieving 500,000 sales in the first half of 2023.

The strongest growth in new sales agreements is observed in Scotland, the North East, and London. This trend reflects more favorable affordability levels in these areas, with London experiencing weak price inflation over the past six years, leading to improved affordability.

The worst period of monthly house price declines is now behind us. Annual house price growth has slowed to +3%, with modest quarter-on-quarter price falls of up to -0.7% observed across all regions and countries in the UK. However, there are early signs that the level of monthly price reductions is decreasing, indicating that the main adjustment in pricing has already occurred. Our UK index is expected to show low negative annual growth by summer and end the year at -1%. Currently, annual growth ranges from +4.8% in Wales to +0.5% in London, which is less than one-third of the levels recorded at this time last year. While some localized areas, such as inner London and Aberdeenshire, continue to experience modest year-on-year price declines of up to -2.1%, most other regions are still registering positive annual growth rates, albeit at a slower pace compared to last year.

First-time buyers (FTBs) were the largest buyer group in 2022, demonstrating their resilience despite higher mortgage rates resulting from tougher affordability testing for new borrowers since 2015. FTBs using mortgages accounted for more than one-third (34%) of all sales last year, followed by existing owners using mortgages (31%) and cash buyers (25%).

Although higher mortgage rates are expected to impact FTB demand the most, the majority (approximately 75%) of FTBs come from the private rented sector, where they have been facing significant increases in rental costs. Over the past year alone, rental costs have risen by 11%, equivalent to £1,120. The scarcity of available rental homes, with a third fewer homes on the market than the long-run average, is prompting more FTBs to consider homeownership, especially as mortgage rates have fallen to 4.5%. However, the main challenges for FTBs remain access to a deposit and having a sufficient level of income to afford a mortgage, which varies greatly across the country.

The average asking price for a 3-bedroom FTB home is £230,000, while it is £210,000 for a 2-bedroom property. The increased house prices over the last three years have led to an average increase of £7,530 in the household income required to purchase a 3-bedroom FTB home, bringing the total required household income to £55,900. For 2-bedroom homes, the increase is lower at £4,900, resulting in an income requirement of £51,000. The deposit needed to purchase a 3-bedroom FTB home has risen by £4,650 to £34,500, while for a 2-bedroom home, it is £3,000 higher at £31,500.

The impact of higher house prices on FTB affordability is not evenly distributed and depends on the level of prices and their changes over the past three years. FTBs in southern regions have faced greater price increases compared to those in northern regions. Affordability has worsened the most in higher-value markets like London and the South East, where the income required to buy a home has increased by up to £12,150 for 3-bedroom homes since 2020. The largest increase in income needed to purchase a 2-bedroom home is £7,300 in the South-West and East of England. In lower-value markets, the increase has been more modest due to generally lower pricing for FTB homes. This discrepancy in affordability explains why market activity is holding up better in the north of England, Wales, and Scotland, where housing is more affordable compared to southern England.

To manage the affordability pressures, FTBs have several strategies at their disposal. One option is to save a larger deposit or seek financial support from family members (the 'bank of mum and dad'), where available. However, saving for a deposit becomes increasingly challenging for renters as rising rents consume a larger portion of their income, leaving them with less capacity to save. Another option is to opt for longer mortgage terms, which increases buying power. Over the years, there has been a steady rise in mortgages with terms exceeding 30 years. Choosing a 35-year loan provides buyers with a 20% boost in buying power compared to a 25-year loan, albeit at the cost of paying 48% more in mortgage interest payments over the life of the loan.

Additionally, some FTBs are adjusting their requirements by focusing on buying smaller and more affordable homes. In recent years, lower mortgage rates have enabled FTBs to purchase larger 3-bedroom homes. However, the current higher mortgage rates and prices are leading some FTBs to consider 1 and 2-bed flats instead. The demand for 3-bedroom homes has declined to 40% in Q1 2023, while demand for 1 and 2-bed flats is increasing. Outside of London, the average asking price for a 2-bed flat (£200,000) is 29% lower than that of a 3-bed house (£280,000).

Furthermore, the flexibility to work from home is encouraging some FTBs to explore options further away from major employment centers, seeking larger homes at more affordable prices. This trend explains why there hasn't been a significant shift in the types of properties FTBs are interested in. Consequently, demand for homes in the suburbs of towns and cities with good transport connections to major employment centers remains stable, and price growth in these areas continues to surpass the average, such as in Oldham (North West), Wolverhampton (Midlands), and Selby (Yorkshire).

In conclusion, the sales market is experiencing a soft landing, with steady recovery in demand and sustained growth in new sales agreements. House price inflation is slowing down, and the likelihood of a major price re-correction remains low. FTBs, despite facing higher mortgage rates and increased affordability challenges, continue to be the largest buyer group, with strategies such as larger deposits, longer mortgage terms, and adjusting property preferences helping them navigate the market. The affordability pressures vary across regions, with southern England experiencing greater challenges compared to the north. As the market continues to evolve, FTBs will likely explore options to manage affordability concerns, potentially leading to shifts in demand for property types and locations.