Another month, another record for house prices. On Friday, the UK’s largest lender, Halifax, reported that the average cost of a home had risen to just under £300,000 after a 1.3% jump in November.
After a pandemic, a cost of living crisis and a mortgage market meltdown two years ago, you might have expected prices to be roughly where they were five years ago – instead, they are up by more than 25%. So, how did the market defy the odds?
Clearly, it doesn’t cost £300,000 to buy a home in every part of the UK – Halifax’s headline figure, which is based on a methodology that tries to represent a typical house, disguises huge regional variations.
Its latest data shows an average of just over £200,000 in Scotland and Northern Ireland and £545,439 in London. But all have been trending upwards and are far more than incomes.
For years house prices were driven by cheap credit. In the aftermath of the financial crisis, the Bank of England base rate was slashed, and mortgage rates followed.
In the first years of the 2010s the market was sluggish in many parts of the UK, while London roared on. But, eventually, prices started to go up everywhere. Low mortgage rates led in part to lower monthly costs, but also to larger loans, which drove up prices.
Government interventions such as stamp duty cuts and help to buy added further fuel to the fire, and, according to Halifax’s index, prices rose from an average of £168,482 in November 2010 to £239,079 as the decade ended.
Over time, banks and building societies have relaxed lending limits, which has also pumped more money into the market. Anthony Codling, a property analyst at RBC Capital Markets, said: “Borrowers used to be able to raise three times their salary or 2.5 times a joint salary, now they are borrowing 4.5 times.”
This “credit expansion” has been further boosted by inherited money, he said. He added: “The year 1971 was when we reached 50% homeownership in this country – it was as late as that. We’re now at the time when that first wave of mass affluence is being passed on.”
The banks of mum and dad, and grandma and grandad, have helped with deposits, and they could become even more generous with their gifts after changes to the inheritance tax on pensions announced in the recent budget.
The Covid pandemic brought a temporary pause, but as soon as estate agents reopened for business, buyers were out in force.
“The pandemic led large numbers of people to reassess what they actually wanted from housing,” said Neal Hudson, housing market analyst at consultancy BuiltPlace. “The so-called race for space saw people looking for larger homes and moving out of London.”
On top of this, the then chancellor Rishi Sunak paused stamp duty on homes costing up to £500,000 (in England and Northern Ireland), “which added accelerant to the enthusiasm”, said Hudson.
The mini-budget under Liz Truss in September 2022 caused chaos in the mortgage market and a spike in mortgage rates.
Since then, the average cost of a home loan has bumped up and down. According to Moneyfacts, the average two-year rate stood at 5.49% on Friday – considerably higher than the 2.34% reported in December 2021. But still, prices go up.
Hudson says, “all things being equal”, the higher mortgage rates should have caused a 15-20% fall in house prices, but instead, buyers have been changing their behaviour to absorb the extra cost.
One way is by stretching out mortgage terms. This was already happening as lenders looked beyond the traditional 25-year mortgage, but figures from the trade body UK Finance show the current average length of new loans is now firmly above 28 years. Among first-time buyers, the average is 31 years.
And buyers are committing more of their income to repayments. UK Finance figures show that monthly mortgage costs to cover the original loan and interest are running at 22% of income for first-time buyers – a figure last seen in 2008.
Hudson said some may be taking the view that rates will come down, but a rise in the proportion of buyers spending more than 30% of their earnings on their mortgage means the market is riskier than it was in the decade up to 2022.
The fact that those earnings have risen is another factor behind today’s high prices, said Codling.
“House price inflation tends to be a little bit higher than the RPI [Retail Price Index]. Inflation leads to wage growth,” he said. “All of that wage growth is multiplied – so for every £1, you can borrow an extra £4.50.”
Inflation has fallen, and affordability will get stretched as mortgage repayments take up more incomes. December is typically quiet in the housing market, so the £300,000 mark may not be breached this year.
However, the drive to buy remains as rents have also been going up, and – despite moves towards making it a more secure way to live – homeownership is still more attractive. As long as that remains true, we should expect more records.
