Mortgage rate hitting affordability and hurting market

The Nationwide has calculated that house buyers with mortgages are now pay far above the long term average.

The lender, in its latest house price index, says a borrower earning the average UK income - and buying a typical first-time buyer property with a 20% deposit - would have a monthly mortgage payment equivalent to 37% of take-home pay, which is well above the long run average of 30%.

UK house prices edged up by 0.2% in June, according to the Nationwide.

This resulted in the annual rate of growth rising from 1.3% in May to 1.5% in June, leaving prices around 3% below the all-time high recorded in the summer of 2022.

Nationwide chief economist Robert Gardner says: “Housing market activity has been broadly flat over the last year, with the total number of transactions down by around 15% compared with 2019 levels.

“Transactions involving a mortgage are down even more (nearly 25%), reflecting the impact of higher borrowing costs. By contrast, the volume of cash transactions is actually around 5% above pre-pandemic levels.

“While earnings growth has been much stronger than house price growth in recent years, this hasn’t been enough to offset the impact of higher mortgage rates, which are still well above the record lows prevailing in 2021 in the wake of the pandemic.

“For example, the interest rate on a five-year fixed rate mortgage for a borrower with a 25% deposit was 1.3% in late 2021, but in recent months this has been nearer to 4.7%.

“As a result, housing affordability is still stretched.”

In response Jeremy Leaf, north London estate agent and former RICS residential faculty chair, comments: “Early spring optimism all but disappeared when it became apparent that any reduction in mortgages rates would be delayed. This reliable indicator of housing market health also shows how the election announcement had little impact on prices or activity and underlines how cash purchases are playing a more important role. Now that inflation has started to fall, expectations are growing that the drop in base rate may not be delayed too long after all.”
 
And Nathan Emerson, chief executive of Propertymark, says: “It’s especially positive news to see further progression within the housing market year on year, with affordability and confidence returning, despite interest rates remaining high currently. Once the political climate fully settles down following the general election, the housing market will hopefully see yet more buoyancy. Propertymark remains keen to see plans from policymakers as to how any incoming government intends to kick start their proposed house building ambitions, as well as learn more regarding any programme of support for first time buyers.”
 
Tom Bill, head of UK residential research at Knight Frank, adds: “The seasonal spring bounce in the UK housing market has been a little lacklustre this year, with demand kept in check by high mortgage rates and a degree of uncertainty around the election. A new government and the first rate cut since March 2020 should inject more energy after the summer and we believe UK prices will rise by 3% in 2024.”