3 October 2023 – With mortgage rates still at an elevated level, many buyers adjust their wishes and go for smaller properties and longer-term mortgages to improve affordability.
New data shows that buyers are still keen to buy. But in order to be able to afford to buy a home, many have to adjust their wish list.
Smaller properties are the most common adjustments many make, with average property values on mortgage applications down by 5.3% compared to 12 months ago, according to one Building Society.
However, this is only one way buyers improve affordability. Especially younger buyers look at reducing their monthly mortgage payments by opting for longer-term mortgage deals.
Flats Perform Better Than Other Property Types
Even though property prices have declined in recent months, high mortgage costs have kept many buyers from being able to afford the dream home.
Many are looking at smaller properties with lower values in order to improve their ability to buy a property. According to data by Nationwide, the average property values on mortgage applications have dropped by 5.3% compared to a year ago.
There are signs that more buyers are looking towards smaller, less expensive properties, with transaction volumes for flats holding up better than other property types. This may be because affordability for flats has held up relatively better as they experienced less of a price increase over the pandemic period.Robert Gardner, Chief Economist at Nationwide
Another way buyers, in particular those under 30, try to reduce their borrowing costs is by choosing longer-term mortgage deals. Consumer credit report company Experian said that 10% more young people opted for a 35-year mortgage this year compared to January 2020.
25% of all mortgages taken out by under-30s had a 35-year term. While a longer term does reduce the monthly payments, it makes the mortgage over all more expensive.
But many feel that they don’t have a choice if they want to get onto the property ladder.
Nationwide’s data also suggests that many buyers decided to wait until market conditions are more favourable again, with activity falling by 30% compared to pre-pandemic levels.
Summer Slump Or Market Slowdown
Traditionally, the summer months tend to be slow, with kids off school and the holiday season in full swing. According to the latest figures by HMRC, property sales have fallen by 16% in August compared to August last year.
Such low levels have never been seen, not taking into account August 2020 when the pandemic closed the property market for months. This suggests that the market is suffering from more than just the seasonal slump.
However, there are also positive signs in the HMRC data. The number of sales in August has risen marginally by 1% compared to July. Already June and July have seen a rise in activity.
With property sales increasing by 6% in June compared to May and 0.3% in July compared to June.
The surprise decision by the Bank of England not to raise interest rates in September due to an unexpected fall in inflation, alongside major lenders lowering some mortgage rates, is probably responsible for the uplift.
However, house prices are still much higher compared to pre-pandemic levels, as are borrowing costs. This makes affordability a huge challenge for many buyers.
According to Nationwide, first-time buyers now have to spend 9% more of their take-home pay on monthly mortgage payments than before.
Buyers must spend 38% of their salary on mortgage payments to buy a typical first-time buyer home with a 20% deposit, considering an average income. The long-running average was 29%, which is quite a jump.
The above discussed data seems to suggest that the housing market is experiencing more than just a summer slump. The decision to buy smaller properties and opt for longer-term mortgages show that affordability is putting pressure on many buyers.
However, there are also signs that indicate that the market is still resilient and could recover soon. The slight month-on-month increases in the number of property sales over summer show that buyers as well as sellers do have confidence in the market.
But with the economic landscape still being volatile, it is difficult to predict what will happen next. We will have a first indicator of how the market is faring when we see data from September and October.
There is traditionally a small peak after the summer slump, when many buyers get organised in an attempt to seal a deal before Christmas. If we see this, then the signs look good.
If inflation continues to fall, mortgage rates are likely to follow, even if we won’t see such low levels we had before the pandemic hit. At the same time, we believe that house prices will drop slightly by the end of this year compared to last year.
But as affordability improves, house prices are likely to pick up again next year, provided the economic situation doesn’t worsen.