Rising mortgage rates will dampen demand in H2: Zoopla

Its latest house price index reveals that whilst demand this year has remained above the five year average, the impact of higher mortgage rates will have a growing impact on market activity in H2, especially for first-time buyers and home buyers in southern England.

As inflation and interest rates continue to climb, people will need a 10% rise in salary to maintain their standard of living according to the Bank of England - let alone purchase a property.

Those in the south east of England will need at least an additional £15,750 salary where house prices are higher, and buyers will need up to £34,500 more income in London. However, in lower value regional markets such as the North East, the increase will be less than £5,000. As more people are priced out of the market - especially in the areas where the house prices are highest - it means less demand from first-time buyers which will hinder house price growth. Some outpriced first-time buyers will look to buy smaller, lower value homes as rising interest rates impact affordability. They may also consider moving further afield as post pandemic circumstances allow many to continue hybrid working.

Despite higher living costs, post-pandemic factors such as desire for more space continue to stimulate demand as new sales agreed remain on a par with 2021. A key factor is that higher mortgage rates for new loans, which have more than doubled since January 2022, are yet to impact the market.

Zoopla predicts that the jump in mortgage rates for new buyers will compound cost of living increases and impact house sales from autumn into 2023. Growing pressure on household budgets and on-going re-evaluation by homeowners of their property brought about by the pandemic will support overall sales, but this is not expected to translate to higher house prices as increasing costs will make consumers more conscious of their overall spending.

Until recently, the repayments for a mortgage were lower than renting in all regions (2% mortgage rate) outside of the capital. In London and regions in the South of England, the mortgage rates increasing to 4% would push the income to buy to be on a par with, or above the average rent. This shift is likely to affect demand from those seeking to get onto the property ladder primarily in southern England.

House prices continue to grow with the average home having increased by 8.3% or £19,800 in the past 12 months. The South West and Wales are jointly the best performing regions, with annual house price growth of 10.6%. Demand has fallen to under a third of levels seen in spring, however, at 17% nationally, it’s still above the five-year average. The highest level of buyer interest in the UK can be found in the West Midlands (+35%) and the North East (+29%) with the market in London weakest, coming in at 6%.

First-time buyers are now the largest buyer group accounting for up to 35% of sales this year to date and are driving the market with pandemic related factors and a desire to own a home currently offsetting the increasingly uncertain economic outlook.

Richard Donnell, director of research at Zoopla, said: “The housing market has been resilient to the rising cost of living so far. The new energy price cap will add to the pressure facing households especially those on lower incomes. We see the recent jump in mortgage rates having a greater impact on housing market activity and prices moving ahead. First-time buyers on lower incomes, those looking to trade-up using a bigger mortgage and buyers in the south east of England will all feel the greatest impact on affordability.

"We expect a growing number of households to continue to re-evaluate their homes as a result of ongoing pandemic factors and with further impetus from the rising cost of living. This will support overall sales numbers but the rate of price inflation will continue to slow."