In January, UK house prices saw a notable 0.7% increase, marking a positive shift from the 1.8% decline recorded in December. This turnaround has resulted in a much-improved annual rate, now showing a slight drop of only 0.2%. These figures, reported by Nationwide, signify the most robust annual performance in the market since January 2023.
According to Robert Gardner, the Chief Economist at Nationwide, potential homebuyers have reason for optimism. Recent trends indicate a continuous decrease in mortgage rates, offering a favourable environment for those considering property purchases. Gardner attributes this positive development to a change in investor sentiment regarding the future trajectory of the Bank of England’s interest rates. Investors are increasingly optimistic that the Bank of England will opt for rate reductions in the coming years, adding to the encouraging signs in the housing market.
These shifts carry notable implications, particularly in the reduction of longer-term interest rates (swap rates) that form the foundation for mortgage pricing at the onset of the year. However, recent weeks have witnessed a partial reversal influenced by unexpectedly robust inflation and activity data, introducing an element of caution into the landscape of interest rate projections.
While the possibility of a swift rebound in economic activity or housing prices in 2024 remains unlikely, there is a perceptible shift towards a slightly more optimistic outlook. According to the latest RICS survey, the descent in new buyer enquiries has shown signs of stabilization, accompanied by tentative indications of an upturn in the number of properties entering the market. These developments suggest a nuanced trajectory for the housing market, prompting observers to navigate a terrain marked by both caution and optimism.
The trajectory of mortgage rates is of paramount importance, given that affordability constraints were the primary impediment to housing market activity in 2023. By the close of the year, a borrower with the average UK income, purchasing a typical first-time buyer property with a 20% deposit, faced a monthly mortgage payment constituting 38% of take-home pay—significantly surpassing the long-term average of 30%.
A potential mitigation to this burden could be achieved if average mortgage rates decline to four per cent, reducing the mortgage payment proportion to 34% of take-home pay, assuming house prices and earnings remain constant. However, maintaining affordability closer to its long-term average would require mortgage rates as low as three per cent, a level still above the post-pandemic lows. Despite these considerations, Gardner highlights that accumulating a deposit remains a formidable challenge, with a 20% deposit for a typical first-time buyer home amounting to approximately 105% of average annual gross income—although down from the peak of 116% in 2022, it remains in proximity to pre-financial crisis levels.
The persistent high house prices in relation to earnings are evident in the house price to earnings ratio, which stood at 5.2 by the end of 2023—significantly surpassing the long-term average of 3.9. This disparity contributes to the escalating reliance of first-time buyers on external assistance for deposit accumulation, with nearly half of them seeking help from friends, family, or inheritances in 2022/23—an increase from 27% in the mid-1990s.
Chief Economist Robert Gardner notes the substantial regional variations in affordability, with pronounced challenges in London, the South of England, and East Anglia. In contrast, Scotland and the North remain more affordable regions, where mortgage payments as a proportion of take-home pay align more closely with their long-term averages.
“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 per cent higher than the average income in the capital (for an adult fulltime worker).
“Similarly, in the South East and East of England, the average income of actual first-time buyers is around 25 per cent 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.”
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