Mortgage costs push housing market into north-south divide

It might look like house prices have stabilised, staying relatively flat over the first four months of 2024, but at least one mortgage expert says there’s now a  north/south divide thanks to the costs of borrowing.

Sarah Coles, head of personal finance at Hargreaves Lansdown, says: “This is a function of the fact that mortgage rates remain so stubbornly high. Banks are pricing in the fact that the Bank of England’s cuts are expected later than they had hoped for earlier in 2024. At the end of April, the average two-year fixed rate mortgage had crept up to 5.87% - from 5.8% at the end of March.

“It’s not a dramatic move, but it’s in the wrong direction, and it’s coming at a time when homeowners expected mortgage rates to be dropping.

“In the south, prices tend to be higher – the priciest are in London where the average home costs £539,336. It means mortgages are bigger, and so higher rates hit harder. Buyers are having to wait, and hope that rates fall, in order to afford the kind of property they really want to live in – or lower their ambitions and buy somewhere they can bear to live with instead. As a result, demand is down, and property prices are level or falling.”

Coles was making her remarks in the wake of new figures from the Halifax.

The lender says house prices last month were just 1.1% higher than April 2023. The average house price is now £288,949: the quarterly change is 0.8%, while prices are up 0.1% month-on-month.

Amanda Bryden, head of mortgages at the Halifax, comments: “UK house prices held steady in April, rising on a monthly basis by just +0.1% (less than £200 in cash terms). Annual growth rose to +1.1%, from +0.4% in March, though this can be attributed to the base effect of weaker price growth around this time last year.

“The average property now costs £288,949, compared to £287,244 at the start of the year. While there is always much scrutiny of monthly price changes – and a degree of volatility is to be expected given current market conditions – the reality is that average house prices have largely plateaued in the early part of 2024.

“This reflects a housing market finding its feet in an era of higher interest rates. While borrowing costs remain more expensive than a few years ago, homebuyers are gaining confidence from a period of relative stability. Activity and demand is improving, evidenced by greater numbers of mortgage applications so far this year, while at an industry level mortgage approvals have reached their highest point in 18 months.

“Our recent research also found that buyers are adjusting their expectations, with first-time buyers in particular compensating for higher borrowing costs by targeting smaller properties. We see 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.

“However, we can’t overlook the fact that affordability constraints are still a significant challenge, for both new buyers and those rolling off fixed-term deals. Mortgage rates have edged up again in recent weeks, primarily as a result of expectations around future Bank of England base rate changes, with markets now pricing in a slower pace of cuts.

“If, as is still expected, downward moves in Bank Rate come into play later this year, fixed mortgage rates should fall. Combined with the resilience displayed by the housing market over recent months, we now expect property prices to rise modestly over the course of 2024.”

Hargreaves Lansdown’s analysis suggests that sellers have some hope, with interest rates projected to fall in the second half of the year, and at least a couple of cuts this side of the New Year.

But Sarah Coles adds: “However, the market remains in the balance. On the one hand, the RICS report has shown that buyers are still optimistic enough to keep coming back to the market - despite higher rates. On the other hand, rate falls are now expected to come later and kick in more slowly than many had predicted: it may not be the shot in the arm sellers were hoping for. It means that while the property market may well spend 2024 in positive territory, it’s likely to be fractional, and it may take a while longer for sales to take off.”