Halifax: smaller homes drive house price growth

Demand for homes on the lower rungs of the property ladder is driving house prices up, new research by Halifax has found.

The Bank’s findings, which have been based on its monthly House Price Index (HPI), showed UK prices had grown 1.9% (£5,318) year-on-year as of February 2024. But within the data, flats and terraced homes saw their value increase faster than semi-detached and detached homes.

Flats saw the biggest jump in average value, rising 2.7% (£4,290) to £163,016 compared to February 2023. Meanwhile, the slowest growth was recorded among semi-detached houses where average prices grew 1.7% (£4,797) to £295,199.

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It means the Covid-era ‘race for space’ may be coming to an end, Halifax suggested. The bank also pointed to the importance of first-time buyers (FTBs) to the market, with its analysis finding 53% of all property purchases involving a mortgage in 2023 were conducted by new entrants to the housing market - the highest proportion of FTBs since 1995. The majority of these buyers purchased flats and terraced houses.

The bank’s findings appear to contradict Rightmove’s HPI, which was published last week. While it also recorded annual growth in UK average asking prices, it said this was largely coming from demand at the top end of the housing ladder. However, it should be noted that Rightmove’s data covers early April, and is based on asking prices rather than prices at the mortgage agreement stage that Halifax deals with.

The Office for National Statistics (ONS) also painted a different picture to Halifax’s, with its February data showing a fall in annual prices. However, the completed transactions it has recorded may have seen their prices agreed up to several months prior to February.

It all comes as mortgage rates have risen in recent days in response to market uncertainty over when the Bank of England will cut interest rates. Earlier this month, Nationwide directly blamed mortgage market chaos for worse-than-expected house price data.

Halifax: top-rung house prices ‘squeezed by affordability constraints’

According to Halifax, the boom in smaller properties in the year to February came at least partly as a result of the cost of living crisis. With interest rates sitting at a 16-year high, and inflation continuing to eat into personal finances, the bank said buyers were having to “adjust their expectations”.

Amanda Bryden, head of mortgages at Halifax, said: “As interest rates have stabilised and buyers adjust to the new economic reality of owning a home, one way to compensate for higher borrowing costs is to target smaller properties. This is especially true among first-time buyers, who have proven to be resilient over recent years, and now account for the largest proportion of homes purchased with a mortgage in almost 30 years. 

“We’ve seen this reflected in property prices for the first few months of this year, with the value of flats rising most sharply, closing the ‘growth gap’ on bigger properties that’s existed for most of the last four years.”

This gap still has larger homes well out in front when you compare average house price growth between different property types since the pre-pandemic period. Covid-19 lockdowns and a temporary stamp duty holiday led to a surge in demand for bigger out-of-town properties, with inner-city homes losing value as a result.

Detached houses have seen a 23.9% (£87,034) average surge in growth since March 2020, while semis have grown 21.4% (£51,950). In contrast, terraced homes have registered growth of 20.5% (£38,090) over the period, with flats mustering an average increase of just 11.9% (£17,349).

Flats growing fastest in Scotland, Halifax house price data finds

While the UK market overall is struggling with mortgage affordability and a lack of supply of new homes, Bryden added there is a “more nuanced story” at a regional level. She said demand for different categories of property can “vary hugely” depending on where you live.

For example, Halifax’s findings have shown that in Scotland, flats have outperformed all the other property categories over the past year with an average price hike of 5.9% (£6,489) to £116,477. But, in Yorkshire and Humberside, apartment prices have fallen 2.9% (-£3,188) year-on-year to £108,374.

Conversely, detached properties registered the strongest annual growth in Yorkshire and Humberside, rising 5% (£17,300) on average to £360,370. But, in the South East, where affordability constraints have been especially strong given the high cost of property in the region, detached prices were 1.1% (-£7,039) down against the year at an average of £611,355.

When viewed over a four-year period, this drop can be seen to be a small blip for sellers in the South East as prices have grown 20.2% (£102,794) since March 2020. Indeed, since the pandemic hit, only Greater London (+13.8%) and Eastern England (+19.1%) have seen the value of detached properties grow by less than a fifth. It has been a similar story for semi-detached and even terraced houses, while only two regions - the East Midlands (+18.7%) and North West of England (+18.1%) - managed to record growth of more than 15% for flat prices.