“The average home now costs over £30,000 more than it did this time last year, but with sluggish wage growth and lower disposable income, it may feel like the goal posts have been moved for first-time buyers.
“The market may not be running away for everyone though, with parts of Scotland and Northern Ireland experiencing lower house price inflation.
“Estate agents are still seeing an imbalance between supply and demand, with potential buyers queuing up as soon as properties come up for sale. When this eventually begins to narrow, we may see house prices cool down to more achievable levels.”
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.
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.
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House price rises have dwarfed UK workers’ average salary, which was around £32,000 in 2021 and rose only 3.6 per cent in real terms in the previous year.
By contrast, house prices have grown for 11th consecutive months, according to Halifax managing director Russell Galley, and are now around 10 per cent higher than they were in summer 2021.
He said: “The average cost to buy a home in the UK is now £289,099, hitting yet another record high. Despite the very real cost of living pressures some people are experiencing, the imbalance between supply and demand for properties remains the primary reason driving the continued climb in house prices.”
Although the cost of living crisis has slashed household incomes, the lack of affordable homes has kept prices high.
“The housing market has retained a surprising amount of momentum given the mounting pressure on household budgets and the steady rise in borrowing costs,” said Robert Gardner, Nationwide’s chief economist.
Gardner added: “Nevertheless, we still think that the housing market is likely to slow in the quarters ahead. The squeeze on household incomes is set to intensify, with inflation expected to rise further, perhaps reaching double digits in the quarters ahead if global energy prices remain high.”
Although there remains a shortage of homes on the market, that doesn’t mean supply hasn’t increased according to Zoopla.
The property site saw a five per cent increase in the number of homes up for sale when compared to the average over the last five years.
But it has not been enough to keep up with demand.
“Buyer demand remains elevated as the trends that emerged during the pandemic – a reassessment among households about where and how they are living – continue to drive the market,” said Gráinne Gilmore, head of research at Zoopla.
“Demand is strongest for family houses, indicating a continued appetite for additional internal and external space. But demand is up across nearly all property types, indicating that those thinking of moving are in pole position to sell.
“Given the tick up in new listings of homes for sale, there is now a wider choice of homes for movers and all buyers. The increased economic headwinds, including the rising costs of living and increasing mortgage rates, [mean] property price growth will start to moderate as we move through the second half of 2022.”
In total 3.5 million homes in England and Northern Ireland have moved into a higher threshold as well as 815,000 properties in Scotland and Wales.
In May, Zoopla said a £29,000 increase in house prices in a year has also seen 4.3 million homes move into higher stamp duty brackets, meaning buyers will have to pay more to buy a property if they came on to the market.
Significantly, 1.5 million extra properties now attract a stamp duty charge when compared to two years ago, while 1.9 million properties have moved out of the reach of first-time buyers in England and Northern Ireland who receive stamp duty relief on purchases up to £300,000.
As for Zoopla’s fellow property site Rightmove, director of property data Tim Bannister said the housing market was currently experiencing “price rise momentum even greater than during the stamp duty holiday-fuelled market of last year”.
Rightmove’s latest figures, released in June 2022, revealed that the average asking price for a home is now £56,000 higher than before the pandemic.
Interest rates also have an impact on the housing market. 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.
The Bank of England raised interest rates to 1.25 per cent in June as inflation soared to 9.1 per cent.
That has meant that average monthly mortgage payments have eclipsed rental payments, according to Rightmove.
The average monthly mortgage payment – based on a 90 per cent loan-to-value mortgage at a two-year fixed interest rate for a first-time buyer home with two bedrooms or fewer – sits at £901. This is just higher than the £887 for average monthly rents.
The gap has closed between the two in recent years with rents rising at record rates too. The typical mortgage payment has risen 13 per cent in the last 10 years despite house prices rising by as much as 50 per cent overall thanks to low interest rates. By contrast rent payments are 40 per cent higher than a decade ago.
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.
A YouGov poll released by Positive Money said 54 per cent 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 2022?
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 could also see the Bank of England increase interest rates and drive up the cost of mortgages.
Neal Hudson, a housing market analyst for Built Place, said: “While a housing market downturn is far from guaranteed this year, the limited government support for rising household bills ensures that the cost of living crisis is a growing threat to the market.”
Rightmove’s Bannister said that while prices are hitting record levels, price growth is slowing and could sit at five per cent by the end of the year, down from almost 10 per cent in June.
He added: “Entering the second half of the year, we anticipate some further slowdown in the pace of price rises, particularly given the worsening affordability challenges that people are facing.”