The financial pressures facing households led to predictions of a house price crash not too long ago but the market has remained relatively resilient.
In fact, Halifax recorded a second straight month of house price rises in November 2023, up 0.5% or £1,394 on average to £283,615 on average. The revival comes as the Bank of England has opted to freeze mortgage rates after sustained hikes.
But the affordability gap is still seeing people who want to get on the housing ladder and buy a home left disappointed. Halifax’s average price is £40,000 higher than levels house-hunters would be looking to pay pre-pandemic.
The ONS found full-time employees in England would have to spend 8.3 times their annual earnings to buy a home in 2022 while people in Wales would have to spend 6.2 times their yearly salary.
Homes have become considerably less affordable in the last 25 years. Back in 1997 people living in 89% of local authorities could pay less than five times their annual salary to own a home. In 2022 that was true in just 7% of areas.
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Why are house prices so high?
The housing crisis is nothing new in the UK. Demand has outstripped supply for decades but the disruption of the pandemic has exacerbated the issue with record-high price rises following Covid restrictions.
Former chancellor Rishi Sunak introduced a stamp duty holiday to support the property market hit by lockdowns in 2020. That stimulated demand with buyers rushing to complete deals before the tax break ended in March 2021.
The move was a major contributing factor to the widest gap between supply and demand in the market since 2013, according to the Royal Institution of Chartered Surveyors. A further stamp duty cut was introduced by Liz Truss in September 2022 before Jeremy Hunt said the cut will end in March 2025.
Since the pandemic began, a lack of affordable homes and rising demand has seen prices skyrocket.
By August 2022, a typical UK property hit a record high cost of £293,992, according to analysis from Halifax.
That proved to be the peak with economic disruption starting to hit the house market shortly after.
The Bank of England has been raising interest rates in recent months in a bid to cap inflation, which had soared beyond 10% until falling to 3.9% more recently.
The disastrous mini-budget from Liz Truss and Kwasi Kwarteng in September 2022 also took its toll.
But not every commentator agrees that a shortage of affordable homes is the true driver of inflated house prices.
A report released by Positive Money at the end of March 2022 instead blamed price surges on the transformation of homes into financial assets and the loosening of financial regulation and monetary policy over the last few decades. Wider policy changes such as tax incentives, the right to buy scheme and the deregulation of the private rental market also played a role, according to Positive Money’s senior economist Danisha Kazi.
Positive Money’s YouGov poll said 54% of British homeowners would be happy for their home not to rise in value if it meant prices remained more affordable for others.
“The prevalent narrative that house prices are out of reach for so many due to a shortage of homes fails to explain the explosive growth of recent decades,” said Kazi.
“Governments have failed to deal with the housing crisis because of a pervasive view that the public, who are majority homeowners, would be against policies that restrict house price growth. However, the evidence suggests that most people, including homeowners, support a fairer approach to housing which seeks to stabilise prices rather than letting them inflate endlessly.”
Will house prices go down in 2024?
The current economic climate is finally catching up with the housing market.
With no immediate sign of an end to the cost of living crisis and interest rates forecast to rise further, house prices are starting to fall.
But that’s not all good news for people looking to get on the housing ladder.
Rising interest rates mean significant increases in mortgages and that is already deterring people from buying properties.
The BoE reported that there were 47,400 mortgage approvals for house purchases in the UK in October 2023. That’s an increase on September which saw approvals drop to the lowest point in 2023.
Meanwhile, the number of transactions remains down year-on-year, HMRC said. There were 90,920 residential transactions in October 2023, according to the government body’s non-seasonally adjusted estimate. That’s 17% lower than October 2022 and 2% lower than September 2023.
The central bank has been stress testing banks to see if they can weather an economic crisis that could see interest rates hit 6% and inflation reach 17%. Part of that annual stress test also included house prices and the BoE is testing banks’ capabilities to deal with a worst-case scenario of a 31% fall in house prices.
Nationwide reported house prices dropped 1.8% in 2023 and were down almost 4.5% on the all-time highs recorded in the summer of 2022.
Robert Gardner, Nationwide’s chief economist, said: “A rapid rebound in activity or house prices in 2024 appears unlikely. While cost-of-living pressures are easing, with the rate of inflation now running below the rate of average wage growth, consumer confidence remains weak and surveyors continue to report subdued levels of new buyer enquiries.
“It appears likely that a combination of solid income growth, together with modestly lower house prices and mortgage rates, will gradually improve affordability over time, with housing market activity remaining fairly subdued in the interim.”
Two consecutive months of house prices in October and November were the first monthly increase Halifax had recorded in six months.
However, Kim Kinnaird, the director of Halifax Mortgages, said house prices may continue to fall for the next 12 months and beyond.
“The resilience seen in house prices during 2023 continues to be underpinned by a shortage of properties available, rather than any significant strengthening of buyer demand,” said Kinnaird.
“However, the economic conditions remain uncertain, making it hard to assess the extent to which market activity will be maintained. Other pressures – like inflation, the broader cost of living, overall employment rates and affordability – mean we expect to see downward pressure on house prices into next year.”
Rightmove’s house price index tracks asking prices when properties come on the market for sale, which means it acts as an early indicator of changes in the housing market.
The property site saw a 1.9% fall in new seller asking prices in December, although Rightmove’s director of property science Tim Bannister said this is normal for the festive month, citing the increased need for sellers to find a quick buyer.
“High mortgage rates which have added to already-stretched buyer affordability have been a challenge throughout 2023 and this is likely to carry into next year,” said Bannister.
“However for now, there appears to be more calm and certainty heading into 2024, and the annual fall of 1.1% in asking prices highlights the market’s much-better-than-predicted resilience this year.”
Zoopla said house price inflation has fallen from 7.2% rises in November 2022 to a 1.1% fall a year later.
The property portal’s estimates suggest house prices will fall 2% in 2024 but rising incomes will make homes more affordable.
Zoopla’s executive director Richard Donnell said: “The modest decline in house prices over the year means UK housing still looks 10-15% overvalued at the end of 2023.
“We expect this position to improve over 2024 as incomes rise and house prices drift 2% lower over the year. Sales volumes are expected to hold steady at 1 million sales completions over 2024.”
