Buying a home in the UK is more expensive than ever. When will house prices go down?

House prices are at record levels and while the cost of living crisis has continued to hit households’ spending levels, it has done little to stop surging prices so far.

That growing affordability gap is likely to see more people who want to get on the housing ladder and buy a home left disappointed.

Average prices have now reached record levels in England, Wales and Scotland, according to the Office for National Statistics. The average UK house price was £292,000 in July 2022, the ONS found, a staggering £39,000 higher than at the same time last year.

That came as UK average house prices grew 15.5% in July – up from 7.8% in June making it the highest annual inflation rate seen in almost two decades since May 2003.

In its annual assessment, the ONS found the cost of a home was almost nine times the average annual disposable household income as of March 2021 compared to six times in Wales and 5.5 times in Scotland.

That means housing affordability in England is at the worst levels since the ONS started recording figures back in 1999 when a house cost 4.4 times average earnings.

There is also a great disparity in affordability around England. An average priced home in the North East costs the equivalent of 12 years of income for a low-income household whereas in London it is the same as 40 years of income.

In recent months major property sites Zoopla and Rightmove and the UK’s biggest mortgage providers Halifax and Nationwide have repeatedly reported record rises.

Rightmove reported a fifth consecutive month of record prices in June 2022 with the price of a property coming to market hitting an average of £368,614.

It’s down to a lack of homes to fill demand, according to Iain McKenzie, chief executive of The Guild of Property Professionals – a national network of 800 independent estate agents.

“With all the doom and gloom on the front pages recently, you would have thought that house prices would be going the opposite way, but it seems that the housing market doesn’t read the news,” said McKenzie.

“The signs of a slowdown are growing, however, activity is starting to fall, at the same time as new mortgage approvals drop. Expected interest rate rises combined with soaring household costs will start to bite in the coming months. 

“This house price growth is unlikely to continue but it still leaves many first-time buyers priced out of the market. Many people hoping to get on the ladder will have their fingers crossed that prices soften soon and allow them to take that first step.”

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 on March 31 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.

Since then a lack of new houses and rising demand has seen prices skyrocket.

A typical UK property costs a record £294,260 as of August, according to analysis from Halifax.

The price rose 0.4% in August but growth is starting to slow, according to Kim Kinnaird, director of Halifax Mortgages.

“With house price to income affordability ratios already historically high, a more challenging period for house prices should be expected,” said Kinnaird.

“However, this should be viewed in the context of the exceptional growth witnessed in recent years, with average house prices having increased by more than £30,000 over the last 12 months alone.”

There has now been a full year of consecutive house price rises, according to Nationwide.

The mortgage lender reported a 12th straight monthly rise in July with prices up 11% year-on-year.

That became 13 months in August, although price growth slowed to 10%.

“There are signs that the housing market is losing some momentum, with surveyors reporting fewer new buyer enquiries in recent months and the number of mortgage approvals for house purchases falling below pre-pandemic levels,” said Robert Gardner, Nationwide’s chief economist. 

“However, the slowdown to date has been modest, and combined with a shortage of stock on the market, has meant that price growth has remained firm.”

Rightmove revealed in June 2022 that the average asking price for a home is now more than £50,000 higher than before the pandemic.

The property site found first-time buyers face a particular challenge to get on the housing ladder – and the issues don’t stop when they purchase a home.

Rightmove found asking prices for homes with two bedrooms or fewer are up 13% since July 2020 – the equivalent of £17,500 higher on average – while they only rose by 4% or £8,000 between July 2018 and 2020.

Rent rises also make it harder to save up for a deposit to buy a home. Record rent rises have seen the average monthly rental payments surge by 17% or £128 per month in the last two years. That’s higher than the 14% rise in earnings over the same period.

If first-time buyers do manage to beat the odds to get a deposit together and secure a new property, the reality of rising payments does not end when they move in.

Rising housing prices and interest rates mean monthly payments are up to 22% higher than two years ago. A first-time buyer pays £976 per month in mortgage payments  on average – £173 per month higher than two years ago – while between 2018 and 2020 payments rose by £41.

Paul Johnson, the director of the Institute of Fiscal Studies, warned that rising interest rates to combat inflation could have “really big effects” on mortgage payments in the future.

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The Bank of England raised interest rates to 1.75% in August as inflation soared to 9.4%.

Zoopla has warned that the average first-time buyer would need to find an extra £12,250 of income on average to buy a home compared to in August 2021 due to rising interest rates.

There is a regional disparity to how homebuyers will be affected with people in the south-east of England tasked with finding £15,570 extra while in the North East first-time buyers will have to pay £5,000 a year more to secure a home.

That increases to £35,000 in London as the property site forecasted the rates paid on mortgages could hit 4%.

Although the cost of living crisis has slashed household incomes, the lack of affordable homes has kept prices high.

However, there are signs that the record rises seen in recent months are starting to slow as households are affected by rising energy bills.

“We see the recent jump in mortgage rates having a greater impact on housing market activity and prices moving ahead,” said Richard Donnell, director of research at Zoopla.

“First time buyers on lower incomes, those looking to trade-up using a bigger mortgage and buyers in the south east of England will all feel the greatest impact on affordability.

“We expect a growing number of households to continue to re-evaluate their homes as a result of ongoing pandemic factors and with further impetus from the rising cost of living. This will support overall sales numbers but the rate of price inflation will continue to slow.”

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 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.”

Is a house price crash coming?

Nothing can last forever and while there is no guarantee that prices will fall in 2022, the current economic conditions mean that it is growing increasingly likely.

The cost of living crisis is likely to hit households’ ability to move home while rising inflation has seen the Bank of England increase interest rates to counter the issue, driving up the cost of mortgages.

The first signs of house prices starting to fall arrived in July when Halifax reported a 0.1% drop in average prices. 

That meant prices only dropped by a tiny amount – a miserly £365 – but it put to an end a year of consecutive rises on Halifax’s house price index. However, growth returned in August, albeit at just 0.4%.

But things are about to take a downturn, according to Halifax’s Kinnaird.

“While house prices have so far proved to be resilient in the face of growing economic uncertainty, industry surveys point towards cooling expectations across the majority of UK regions, as buyer demand eases, and other forward-looking indicators also imply a likely slowdown in market activity,” said the Halifax expert, citing rising energy bills and borrowing costs due to rising interest rates.

Rightmove’s latest figures also showed the first 1.3% drop in 2022, with house prices down by £4,795. However, unlike Halifax, the property site blamed holidays rather than interest rate rises.

Rightmove’s Bannister said: “A drop in asking prices is to be expected this month, as the market returns towards normal seasonal patterns after a frenzied two years, and many would-be home movers become distracted by the summer holidays.”

Zoopla forecasted that rising mortgage rates are set to weaken demand for homes by the end of 2022 but the cost of living crisis could make others rethink where they live.

“The housing market has been resilient to the rising cost of living so far. The new energy price cap will add to the pressure facing households especially those on lower incomes,” said Zoopla’s Donnell.

“We expect a growing number of households to continue to re-evaluate their homes as a result of ongoing pandemic factors with further impetus from the rising cost of living. This will support overall sales numbers but the rate of price inflation will continue to slow.“

Nationwide’s Gardner also said rising interest rates will have a “cooling impact on the market” as will pressures on household budgets.

Neal Hudson, a housing market analyst for Built Place, said activity is set to fall as prospective buyers struggle to borrow enough cash to meet the high price expectations of sellers.

“This situation will lead to a stagnating housing market. While not immediately disastrous for the housing market, it would contribute to a weaker economy through all the various business directly and indirectly associated with housing transactions,” Hudson said.

“For it to turn into a crash would require a large number of forced sellers. Unfortunately, the cost of living crisis increasingly looks like it may lead to that.”