First-time buyers: is the property market on your side?

It has been a challenging year in the housing market, and if you are considering buying your first home, you are bound to be nervous about taking the plunge. Pulling together some of the latest insights, we delve into affordability, house prices, current trends and mortgages, giving first-time buyers the information they need to make an informed decision on whether now is the right time for them.

Overview of the property market

The UK housing market has seen a significant slowdown in house price growth in the last year. However, it is the decrease in the number of sales that has had the primary impact of higher mortgage rates. According to Zoopla’s House Price Index, the number of homes being sold subject to contract is down 21% compared with last year, with this year set to have the lowest number of property sales since 2012. This significant decline highlights the deep impact of recent economic changes on the housing market.

Zoopla’s House Price Index shows that property sales this year will experience a net decline of 21% compared with 2022. The majority of the fall in sales is from mortgaged buyers, with the number of mortgaged sales expected to drop by 28% compared with last year. Homeowners with a mortgage, who typically account for a third of annual property sales, are under less pressure to move, as they already own a home. As such, many of them will wait for mortgage rates to improve before they move.

The decrease in sales in the housing market can be attributed to affordability. This includes house prices and the cost of mortgage repayments. However, average wage rises of 7% over the last year have improved housing affordability, regardless of higher mortgage rates. With house prices falling modestly, the difference between house prices and earnings is narrowing, with affordability expected to improve by 9–10% over 2023. This improvement is set to result in the UK house price to earnings ratio being 6.3x by the end of the year, making buying a house as affordable as the average over the last 20 years.

While activity in the housing market may remain subdued in the near term, Nationwide’s latest House Price Index report offers hope that a relatively soft landing is still achievable. The report also indicates that affordability could improve, with a mix of income growth and lower house prices, if mortgage rates cool. Robert Gardner, Nationwide’s chief economist, expects unemployment to remain low (below 5%), and the vast majority of existing borrowers should be able to weather the impact of higher borrowing costs, given the high proportion on fixed rates, and where affordability testing should ensure that those needing to refinance can afford the higher payments.

Factors affecting first-time buyers

The growth of UK house prices varies considerably, and one contributing factor is the ability of first-time buyers to afford mortgages at higher rates. These buyers constitute one-third of annual sales, and many of them previously rented. Consequently, the difference in the affordability of renting versus buying has a significant impact on the number of renters who become homeowners. In recent years, low mortgage rates made purchasing more economical than renting on a monthly basis, which led to a surge in first-time buyers, including many purchasing larger 3+ bedroom homes. However, with mortgage rates at 5% or higher, renting is now typically 10% cheaper than buying, which has reduced the number of first-time buyers and consequently limited house price growth.

The types of properties being purchased have also shifted, with a significant drop in demand for detached houses, as buyers now seek smaller and less expensive properties. The cost-of-living crisis has added to the financial burden on families, which, together with an economic slowdown, has impacted affordability and demand at estate agents. Data from Nationwide indicates that mortgage approvals have dropped by almost 10% in the last month, while figures from Zoopla suggest that the UK is on track for around one million house and flat sales this year, the lowest level since 2012. The average rates for two- and five-year fixed residential mortgages remain above 6%, which means that affordability will remain an ongoing concern for many buyers.

Looking ahead

In the next 2 to 3 years, property sales are expected to bounce back due to factors such as flexible work arrangements, demographic shifts in an ageing population, a strong labour market and high immigration rates, all of which will encourage more people to move house. Although mortgage rates are gradually falling and may drop below 5% later this year, it will be a slow process that depends on financial markets assessing the necessary interest rates to control inflation. Therefore, any changes in mortgage rates may not impact the market or improve affordability until the first half of 2024. Due to this uncertainty, house price growth is likely to remain within a range of +2% to -2% for the foreseeable future.

If you’re thinking of selling your home and want an insight into the Chelmsford property market, call our team today on 01245 835859.