It has been a mixed year for the UK property market with stamp duty changes and persistently high borrowing costs creating headwinds. This is reflected in the latest data from Nationwide, which shows house prices unexpectedly dropped by 0.1% in August.
The annual growth rate also slowed to 2.1%, down from 2.4% a month earlier. It brings the average property to £271,079.
The data is weaker than analysts expected. Economists polled by Reuters had forecast a 0.2% monthly rise and a 2.8% annual increase. Research provider Pantheon Macroeconomics was expecting 0.3% and 2.9% respectively.
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“The relatively subdued pace of house price growth is perhaps understandable, given that affordability remains stretched relative to long-term norms,” said Robert Gardner, Nationwide’s chief economist.
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“House prices are still high compared to household incomes, making raising a deposit challenging for prospective buyers, especially given the intense cost-of-living pressures in recent years.”
On 7 August, the Bank of England cut interest rates for the fifth time since their recent peak of 5.25%, bringing the base rate to 4%. Mortgage rates have been coming down, but borrowing costs are still significantly higher than the levels seen for more than a decade after the global financial crisis.
“An average earner buying the typical first-time buyer property with a 20% deposit faces a monthly mortgage payment equivalent to around 35% of their take-home pay, well above the long-run average of 30%,” Gardner said.
He expects affordability to gradually improve if wages continue to grow at a faster pace than house prices. However, it could take some time given how expensive property has become.
The median home in England costs 7.7 times a median employee’s earnings, according to the Office for National Statistics (ONS). The statistics body defines homes as affordable when they are selling for less than five times local earnings.
Sellers should price their property right
Although prices fell in August, based on Nationwide data, it appears to have been a busy summer for the property market. Separate data from property listing site Zoopla shows buyer demand is 4% higher than a year ago, while the number of agreed sales is up 5%.
One reason house prices are a little softer is that there is a glut of supply. There are 10% more homes on the market than a year ago, according to Zoopla, creating a buyer’s market. To attract attention and stand out from the crowd, sellers need to set the right asking price.
The effects of this are more pronounced in the south of the country, where prices are higher and affordability is more stretched. It currently takes an average of 39 days to agree a sale in southern England, versus 27 days in the north west and north east, according to Zoopla. This is keeping prices in check.
“On average, homes that require a price reduction take 2.4 times longer to find a buyer than homes priced correctly from the start,” said Richard Donnell, Zoopla’s executive director of research. “With more homes now coming to the market, getting the price right is becoming increasingly important.”
Over half of homes “underoccupied”
This month’s house price index from Nationwide was published alongside a separate report from the lender, highlighting changes in UK housing stock over the past decade. This showed that properties are getting bigger, but that many of them are “underoccupied”.
Since 2013, the typical floorspace has increased slightly from 95.3m2 to 96.2m2, with the largest increase seen in terraced houses, which are now 3.6% larger on average.
The only property types that are getting smaller are flats and detached houses, which have seen their floorspace fall by 1.7% and 0.6% respectively.
Owner-occupied properties have the largest average floorspace at 112m2. Private and social rental properties are smaller at 76m2 and 65m2 respectively.
While properties are getting bigger, the space isn’t necessarily being used to house more people. Eighty-seven percent of owner-occupied properties in England have at least one spare bedroom, according to Nationwide.
Fifty-three percent have two or more spare bedrooms and are classed as “underoccupied”. This has been rising steadily over time, from below 43% two decades ago.
This trend does not translate into the rented sector. Only 16% of private rented properties are classified as underoccupied. This falls to 8% in the social rented sector, where overcrowding is often a concern.
Some property experts think reforming stamp duty could free up more housing stock. The tax currently acts as a deterrent to downsizing, with empty-nesters holding onto large properties once their children have left home.
Budget rumours suggest chancellor Rachel Reeves could be looking at replacing stamp duty with a national property tax, levied at the point of sale. It is just speculation at this stage and nothing has been confirmed. However, experts say the rumoured replacement could also deter people from selling up.
“A more effective way to catalyse movement in the market would be to introduce exemptions for downsizers and offer greater support for first-time buyers,” said Alice Haine, personal finance analyst at investment platform Bestinvest.
“A tax break for those moving to smaller properties could unlock housing stock, encouraging older homeowners living in under-occupied family homes – effectively last-time buyers – with significant equity to sell up, freeing up more large homes for families.”
