UK Residential Market Update - May 2018
Average UK house price growth remains modest, while in prime central London, there is price growth in some areas after more than 18 months of declines. Meanwhile, policy-makers are focused on the intergenerational housing gap.
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Economic and housing market update
Attention is already turning to the August meeting of the Bank of England’s base rate setters. There are expectations that, having held rates steady at 0.5% this month, they will move to raise rates to 0.75% at the end of the summer.
While a quarter point rise would lift the base rate to a nine-year high, interest rates will still be at a record low on a long-term basis, as shown in the chart below.
Swap rates, the money market rates that determine fixed-rate mortgage pricing, are already starting to rise on the expectation of an increase, but mortgage rates will remain modest in the short to medium-term. The nature of mortgages on offer is also changing.
There is an increasing range of mortgages that are designed to bridge the “deposit gap” for younger buyers by offering up to 95% and even 100% of the value of a new home. However, in a change from the home loans on offer before the Global Financial Crisis of 2008/09, many of these mortgages need to be guaranteed by another party, perhaps a relative with certain levels of capital.
As can be seen from the chart, first-time buyers are now paying an average 16% deposit on a new home, equal to around £26,000, according to data from UK Finance.
The government has marked bridging the generational gap in the housing market as a key priority, illustrated by the scrapping of stamp duty for first-time buyers who are purchasing a home worth up to £300,000 and the reduction in costs for those buying homes up to £500,000.
In the new-build market, around 80% of homes purchased through the Help to Buy Equity Loan scheme have been to first-time buyers. This scheme to bridge the deposit gap is due to end in 2021 – and there are calls for more clarity on how this will happen.
The increasing affordability pressures in some areas of the country are highlighted by the average house price to earnings ratio, which has risen from 5.1 in England and Wales in 2002 to 7.7 in 2017. However, this headline figure masks the regional divide, with HPE ratios ranging from 13.2 in London to 5.2 in the North East.
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