The numbers in the latest Nationwide House Price Index will come as welcome news for UK homeowners. The data show prices rose 0.7% month on month in January, and the annual rate of change was just 0.2% lower when compared to one year ago, proving the resilience of the UK property market.
Robert Gardner (below), Nationwide’s Chief Economist, said:
UK house prices rose by 0.7% in January after taking into account seasonal effects. This resulted in an improvement in the annual rate of house price growth from -1.8% in December to -0.2% in January, the strongest outturn since January 2023.
Signs of easing in affordability pressures
There have been some encouraging signs for potential buyers recently, with mortgage rates continuing to trend down. This follows a shift in view amongst investors around the future path of Bank Rate, with investors becoming more optimistic that the Bank of England will lower rates in the years ahead.
These shifts are important as this led to a decline in the longer-term interest rates (swap rates) that underpin mortgage pricing around the turn of the year. However, the partial reversal in recent weeks in response to stronger than expected inflation and activity data cautions that the interest rate outlook remains highly uncertain.
While a rapid rebound in activity or house prices in 2024 appears unlikely, the outlook is looking a little more positive. The most recent RICS survey suggests the decline in new buyer enquiries has halted, while there are tentative signs of a pickup in the number of properties coming onto the market.
How mortgage rates evolve will be crucial, as affordability pressures were the key factor holding back housing market activity in 2023. Indeed, at the end of 2023, a borrower earning the average UK income and buying a typical first-time buyer property with a 20% deposit had a monthly mortgage payment equivalent to 38% of take-home pay – well above the long-run average of 30%.
If average mortgage rates were to trend down to 4%, this would ease the mortgage payments burden to 34% of take-home pay (assuming house prices and earnings are unchanged). However, other things equal, mortgage rates of 3% (still well above the lows seen in the wake of the pandemic) would be needed to bring this measure of affordability back towards its long-run average.
Deposit burden remains significant: “Raising a deposit also remains a major challenge for those wanting to buy, with a 20% deposit on a typical first-time buyer home equating to c.105% of average annual gross income – down from the all-time high of 116% recorded in 2022, but still close to the pre-financial crisis level of 108%. This reflects that house prices are still very high relative to earnings, with the house price-to-earnings ratio standing at 5.2 at the end of 2023, well above the long-run average of 3.9.
This helps to explain why the proportion of first-time buyers drawing on help from friends and family or an inheritance to help raise a deposit has increased from already elevated levels. In 2022/23, nearly half of first-time buyers had some help raising a deposit, either in the form of a gift or loan from family or friends or through inheritance – up from 27% in the mid-1990s.
A mixed picture across the UK
There remains considerable variation in affordability across the country, with pressures particularly acute in London, the south of England and East Anglia. Scotland and the North continue to be the most affordable regions, with mortgage payments as a share of take-home pay much closer to their long-run average.
These variations have led to stark differences emerging between those who would like to buy and those who are actually able to do so. This is most pronounced in London, where the average income of actual first-time buyers (for a single borrower) is around 55% higher than the average income in the capital (for an adult full-time worker).
Similarly, in the southeast and East of England, the average income of actual first-time buyers is around 25% above the average income in these regions.
However, in parts of the UK where affordability is less stretched, such as Yorkshire & The Humber and the North East, we find that incomes of actual first-time buyers are broadly similar to average regional incomes. Moreover, in Northern Ireland and Scotland, the average income of first-time buyers is actually slightly lower than average incomes in those regions.
Comments from industry experts on the latest Nationwide numbers:
Ruth Beeton, Co-Founder of Home Sale Pack, says: “Despite interest rates remaining at their highest since 2008, we’ve seen buyers tempted back to the market with a carrot of increased mortgage affordability in recent weeks. Whether or not mortgage rates will remain as attractive moving forward is another question, however, all signs currently point towards a property market that is very much on the up.
With murmurings on another Government initiative focussed on fueling demand on the horizon, we could be in for a very busy year. So now could be the ideal time to buy while property values are creeping up and competition isn’t as fierce, as we all know what happened following the launch of the stamp duty holiday.”
CEO of Open Property Group, Jason Harris-Cohen, commented: “The property market has continued to defy expectations, registering strong signs of improvement with house prices increasing on a monthly basis yet again and now sitting just shy of where they were this time last year.
This growth is being driven by an increasing level of buyer confidence, with property prices proving ever-resilient despite a wider landscape of macro uncertainty and interest rates remaining at their highest in over 15 years.
We expect this confidence will grow further should the Bank of England hold rates again this week, and while the decision to do so may cause mortgage rates to creep back up, it’s unlikely to dent the appetite of the nation’s buyers, and we expect market activity to continue to build over the year ahead.”
CEO of Yopa, Verona Frankish, commented: “The property market has started the year where it left off in 2023 – very much on the front foot. We’re seeing buyers return with confidence, spurred on by a reduction in mortgage rates, and there has also been an increase in for-sale stock reaching the market as sellers look to ride this wave of improving market sentiment.
While we expect that interest rates will remain at 5.25% this week, this will only help to steady the market further, providing buyers with the confidence that they can proceed with their purchase without the goal posts of mortgage affordability moving during the process.”
Director of Benham and Reeves, Marc von Grundherr, commented: “Those who were quick out of the blocks at the start of the year with yet more predictions of a property market demise are already reaching for a flannel to wipe the egg off of their faces.
We’ve seen a coiled spring of buyer demand developing in recent months, and with mortgage rates having fallen in 2024, this is now starting to unwind as buyers look to make hay while the sun is shining.
Of course, affordability remains an issue, particularly for first-time buyers. However, for those who can overcome the initial financial hurdle of a mortgage deposit, now remains as good a time as any to make their move.”
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