Concerned about rents rising and want to buy a home - is now the right time?
It's cheaper to buy the home you rent in many regions outside of southern England. If you're a renter looking to become a first-time buyer, is now the time to make a move?
Hundreds of thousands of renters make the jump to owning each year
The English Housing Survey shows that around 166,000 private renter households exit the rental market to buy their first home each year. There are another 87,000 who jump to home ownership directly, often from living with friends and family.
The decision to buy your first home is fraught with challenges and complexities, not least the outlook for the housing market and hoping that prices don't fall, having made your first step into home ownership.
This is compounded by the fact that mortgage rates for new borrowers are more than double the level they were a year ago and the fact that selling schemes like the Help to Buy equity loan have now ended.
Many who would like to buy are feeling under growing pressure to move from the pace of rental growth. Annual rental costs for a renter moving home are up £2,200 since the pandemic, adding to financial pressures at a time when disposable incomes aren’t rising and other living costs are also on the up.
It is important to say that not all renters have a desire to buy and renting is a great flexible option for those that want to remain less tied to a home long term.
Soft landing for house prices and more negotiation and choice
Recent house price index reports cover the detailed trends in the sales market and the outlook. They show that house price growth is slowing, but sales are still being agreed and buyers continue to enter the market. More importantly, we have 65% more homes available for sale than we did this time last year, boosting choice for would-be buyers of all types.
Sellers have been reducing asking prices steadily over the last 6 months as they try to make sure the price is in line with what buyers want to pay. This has been a generally uniform trend across the market. At the same time, sellers are also accepting average discounts of 4-5% off the asking price to help agree a sale. This varies around the country and reflects a return to more normal market conditions.
It’s important to note that in Scotland homes are typically marketed as ‘offers over’ with an accompanying valuation, so this notion of bidding less than the asking price is more of a trend in England, Wales and Northern Ireland.
Overall it looks like prices might fall by up to 5% over 2023 and in some areas we may not see any price reductions. This may not be what first-time buyers want to hear but it's the outlook as things stand today. It's fair to say housing market conditions are the most balanced between sellers and buyers for 4 years and slightly more in favour of the buyer.
Renting vs buying and mortgage availability
Another big consideration is the cost of renting versus buying a home with a mortgage. If a first time buyer is comfortable with monthly rental costs, then this often becomes a benchmark for mortgage repayments and what is affordable.
The biggest hurdle for many first-time buyers is saving for the deposit - and many get support from friends and family to help with this. In recent years we have seen more first-time buyers using larger deposits than was the case before 2007. This is because mortgage rates are cheaper below 90% loan to value loans and there are more regulations that make it harder to access high loan to value mortgages from lenders.
Data from the Financial Conduct Authority up to mid 2021 shows almost two thirds (63%) of first-time buyers take mortgages below or equal to 85% loan to value (LTV). Just over 1 in ten (12%) borrowed at or above 90% LTV, meaning a 10% deposit or less.
In 2017 almost 20% of first-time buyers used a 10% deposit or less, the result of higher house prices, which has more recently been compounded by higher mortgage rates.
It is cheaper to buy the home you rent in many regions outside southern England
We have compared the cost of renting versus buying across different areas of the UK. We assume a renter buys the home they rent in terms of size and price to make it a like-for-like comparison.
This table shows monthly mortgage repayments compared to monthly rents, assuming the borrower uses an 85% mortgage and takes a 30 year loan at a 4.5% mortgage rate. It shows that in markets with lower house prices the monthly mortgage payments are lower than the monthly rental payments by up to 23%.
| Region | Rent pcm | 4.5% mortgage repayments pcm | Difference to rental costs | Mortgage repayments as % of rental costs |
|---|---|---|---|---|
| North East | £598 | £461 | -£137 | -23% |
| Scotland | £671 | £535 | -£136 | -20% |
| Northern Ireland | £658 | £603 | -£55 | -8% |
| Yorkshire & The Humber | £696 | £632 | -£64 | -9% |
| North West | £727 | £636 | -£91 | -13% |
| Wales | £749 | £696 | -£53 | -7% |
| East Midlands | £758 | £756 | -£2 | 0% |
| West Midlands | £784 | £769 | -£15 | -2% |
| South West | £957 | £1,048 | £91 | 10% |
| Eastern | £1,025 | £1,153 | £128 | 13% |
| South East | £1,160 | £1,314 | £154 | 13% |
| London | £1,815 | £2,225 | £410 | 23% |
| UK | £1,049 | £1,108 | £59 | 6% |
Zoopla
In London and the South East mortgage payments are higher than rents as house prices are higher. The reality is that first-time buyers in these regions typically need to put down more equity to afford to buy a home and reduce the monthly repayments to a more manageable level.
Low mortgage rates have enabled some first-time buyers to buy bigger homes than the ones they rent, especially in markets where house prices are at or below the national average.
Many have targeted buying a 3 bed home at a discount to the local market that needs some improvement work. This doesn’t work everywhere and really depends on where you are looking to live and the price of homes.
Mortgage stress testing makes life a little harder
It’s important to acknowledge an extra complication for first-time buyers when looking at mortgage costs. While many will see that mortgage payments are lower than their rent, lending rules can lead to you not being able to get a mortgage.
As part of the lending decision, banks need to make sure a new borrower can afford a higher mortgage rate than they will actually pay. This is called 'mortgage affordability stress testing' and it has been around since 2015.
It means the bank will check to see if you can afford to pay the mortgage at a rate that is closer to 6% or higher, even though you are seeking a loan for 4.5% as in the example above. This is all about ensuring borrowers don’t overextend themselves and have room to manage an increase in borrowing costs.
It's an important regulatory tool for banks that has stopped an over-valuation of house prices in the last few years and means we are not facing a collapse in house prices today. It does, however, make it that bit harder to buy your first home, especially in locations where house prices are higher than average.
Chat to your bank or mortgage broker
While mortgage rates have moved higher, our analysis shows that it is still cheaper to buy with an 85% LTV mortgage than to rent in many areas of the country, assuming you buy the home you rent. Buying a bigger home will shift this dynamic and first-time buyers also need to allow for the impact of affordability testing.
The first thing for a would-be first-time buyer to do is speak to a bank or mortgage broker to see what you can afford by way of a mortgage. Using this with your deposit will help you understand what price of home you can afford, allowing for the fact that there may be some wriggle room to negotiate on price.
Plan for a longer stay in your first home
The final general piece of advice to first-time buyers is don't expect house prices to rise quickly in the coming years. Prices will rise but slowly, more in line with incomes. If you plan to buy your first home, ask yourself if it's the right size and location for you to be there for 5-10+ years, rather than 2-4 years, unless you expect to inherit or gain access to equity to help fund that next move.
Key takeaways
- 75% of first-time buyers come from the rental market each year
- Across much of the country it's cheaper to buy at 4.5% mortgage rates than to rent
- It pays to understand what you can afford as borrowing is more complex
- First time buyers should typically plan to buy a home that will work for the next 5-10 years
When will the pressure on renters start to ease?
With rents up £2,200-a-year since the start of the pandemic and supply 33% down on the five-year average, Executive Director of Research takes a look at what's happening in the rental market.
A tale of two housing markets
The housing market has two narratives. The main question on the mind of buyers and sellers in the sales market is: ‘Will house prices fall and by how much?’. But it’s the total opposite if you are a renter. The cost of renting is rising, and securing a home to rent is the hardest it’s been in the last 5 years.
The latest Zoopla rental index reveals average residential rents have risen by 11% in the last year. That’s over 20% higher since the start of the pandemic.
Rents are rising fastest in the UK’s biggest cities. Manchester and London lead the way with rents here rising by almost 15%. That's more than twice the growth in average earnings.
Even at the bottom end of the rental-growth league table, average rents are up 5-7% in the last year.
Immigration, students and jobs boost competition for rented homes
When the economy reopened mid-2021, the competition for rented homes bounced back too. People were returning to work in the cities.
At the same time, the Government relaxed visa rules for students and postgraduates to attract them to study and work in the UK.
In 2022, we saw a record net inflow of people coming to live in the UK - a sizeable proportion being overseas students.
Most university towns have purpose-built student housing. But, there isn’t enough to go round. The inflow of students is spilling over into the wider rental market.
Each year, on average, we see over 350,000 renters become first-time buyers. But higher mortgage rates have hit first-time buyers hard, preventing some of them from getting onto the property ladder.
Instead of freeing up rental homes, would-be first-time buyers are staying put. This has restricted supply and increased demand for rental properties.
Rental market grows just 1% since 2016
While the demand for rented homes is running high (50% above the 5-year average), the average estate agent has 33% fewer homes for rent than before the pandemic.
This is down to renters staying put for longer (over 4 years on average) but also very slow growth in the overall stock of private rented homes.
Great Britain has 5.6 million rented homes (up from 5.5 million in 2016) with private landlords owning 85% of all rented homes. Tax changes and regulations have stalled new investment by private landlords while some have decided to sell.
The net result is that those selling rented homes are offsetting the impact of new investment coming into the market. This marks a big change from the period 2000 to 2016, when the rental market doubled in size.
There's little evidence that supply will grow quickly
Only by increasing the supply of rented homes can we start to ease the pressure on renters and boost choice. Unfortunately, it’s hard to see rental supply increasing rapidly in the near term.
More regulations are coming down the track to improve standards of rented housing and shift the balance between renters and landlords. At the same time, higher mortgage rates are impacting the costs for landlords entering the market and those remortgaging. Instead, some have decided to sell and pay down mortgage debt.
The next big challenge for landlords are proposals that rental properties need to have an energy efficiency rating of C or higher from 2025. This means a sizeable number of rented homes will need material investment to upgrade to a C rating. Some landlords may prefer to sell rather than make this investment, which will further erode available supply.
One bright spot for supply is the build-to-rent market, where corporate landlords and pension funds are investing in the development of homes for rent. The flow of capital is sizeable but this sector still accounts for less than 5% of all rented homes.
Rental growth to slow as affordability pressures mount
Looking ahead, we expect rental growth to slow to 4-5% over 2023. We expect demand levels to cool and fewer landlords to sell up, boosting supply.
Affordability will become a growing constraint - it’s not possible for rents to grow much faster than earnings for a sustained period. Our data shows rents as a percentage of average earnings (for a single person) are at or above the maximum levels seen over the last ten years. They are lower in London than the maximum seen in 2015 but high by national standards.
So, we expect growing affordability pressures to act as a brake on rental growth. This will be a small comfort for renters, but there needs to be a sustained increase in supply to improve rental market conditions.
The Government’s focus on improving standards is important. But so is encouraging all types of landlords to continue to invest. It will boost an important housing tenure that is key for the UK’s economic growth.
Key takeaways
- Conditions in the rental market are the total opposite of the UK sales market
- Demand has risen alongside jobs growth and record net immigration
- Higher borrowing costs make it harder for first-time buyers to get out of the rental cycle
- The annual cost of renting is £2,200 higher since the start of pandemic
- The number of rental homes has increased by just 1% since 2016
- Affordability pressures will slow rental growth
Base rate rises to 4.25% but new fixed rate mortgages to stay at 4-4.75% for 2023
The latest rise in the base rate to 4.25% is unlikely to have an impact on new fixed rate mortgages in 2023.
Interest rates rise again
The Bank of England increased interest rates one more notch, from 4% to 4.25% today. Inflation isn’t falling as fast as some had hoped, opening the door for more monetary tightening to reduce demand and cool the pace of price increases.
In the US, the Federal Reserve has raised interest rates again this week, despite some problems in the banking system. However, it has signalled that the need for more rate increases is probably over now.
UK mortgage rates have been dropping back
It’s not clear whether a further small increase in UK interest rates will push mortgage rates much higher. In the UK too there is a sense that base rate increases are coming to an end.
Average fixed rate mortgages have dropped back over the last 3 months from the highs seen at the end of 2022. Bank of England data shows the average 5-year fixed rate mortgage for a 75% loan to value (LTV) mortgage has dropped to 4.38% from a high of 5.6% last October.
What many borrowers will remember is the ultra-low 1.2% mortgage rates reached in September 2021. This was the low point, before rates started to increase over 2022 as inflationary pressures built up, which were then boosted by the impact of the mini budget late last year.
Mortgage pricing is complex
How banks set mortgage rates is complex and there is not a fixed relationship between mortgage rates and the interest rates set by the Bank of England.
It all depends on where banks get their funding from in order to lend money out as mortgages - and what this funding costs. They then add a margin onto this cost to reflect risk and a profit margin, which makes the mortgage rate.
This is why higher loan to value mortgages attract slightly higher mortgage rates, as there is more risk lending at 90% LTV than say, a 50% LTV mortgage.
Banks use savings from depositors such as households and companies to turn into loans. Current accounts also add to the funding pool.
Banks also secure funding for mortgages from the money markets. They can access fixed rate money for 2 or 5 years or longer. The cost of this money is called the SWAP rate - the cost of swapping variable rate money to fixed money for a defined period.
The price of this fixed rate finance will be influenced by where markets believe interest rates will go over the period the money is secured for.
While base rates might go up in the short term, if the view is that inflation will slow quickly and interest rates will fall then this may result in SWAP rates being lower than base rates. The 5 year UK SWAP rate is currently 4% and has fallen back from a high of 5.3% last year.
Banks will use a blend of sources as they price mortgages and this means an increase in interest rates doesn't necessarily flow into the cost of new mortgages. Borrowers on variable rate mortgages, where the cost is linked to the base rate, will see mortgage rates increase as the Bank of England raises rates. But for the majority on fixed rate loans there will be no change.
Mortgage rates likely to hold where they are for much of 2023
We expect fixed rate mortgage rates for new business to sit between 4% and 4.75% for much of 2023. This is low by historic standards but means the average buyer will face an increase of £200 to £500-a-month more in mortgage repayments than at the start of 2022, when mortgage rates were much lower.
We don't expect the increase in the base rate to make much difference to the outlook for the housing market. Demand for homes is down on last year but sales are still being agreed, albeit at a slower rate (20% lower).
People still want to move and households are resetting their plans in an environment of higher borrowing costs. Talk of a big price correction in home values has been overplayed and if you price your home sensibly, it’s likely to attract interest subject to some negotiation on the final price.
Key takeaways
- The Bank of England has increased the base rate by 0.25% to 4.25%
- However, fixed rate mortgages for new borrowers are likely to remain between 4% and 4.75% for much of 2023
- Mortgage rates are set by multiple factors, including the different costs of money for banks
- And they have dropped back to an average of 4.5% over the first 3 months of this year
What does the Spring Budget mean for the housing market?
As household budgets are squeezed with higher mortgage rates and cost of living pressures, this was a budget that focused on stimulating the economy and jobs, says Richard Donnell.
As household budgets are squeezed with higher mortgage rates and cost of living pressures, this was a budget that focused on stimulating the economy and jobs, says Richard Donnell.
This week’s Budget had little direct impact on the housing market. Stamp duty is unchanged and there are no big changes for landlords, other than a lower level of tax free gains before paying capital gains tax.
The Chancellor has focused the Budget on stimulating the economy and jobs, encouraging as many people as possible to keep working and help fill the UK’s 1m job vacancies.
Focusing on economic growth and jobs ultimately supports the housing market as the health of the housing market is directly linked to the health of the economy.
Housing sales and prices tend to stagnate and fall when the economy is doing badly and unemployment is rising, while the opposite is true when the labour market is strong and post-tax household incomes are rising.
The tax burden has been rising for those on mid to higher incomes, meaning there has been no growth in post tax disposable incomes over the last 2 years.
Household budgets are also being squeezed by higher living costs and many will welcome the Budget announcement of a 3 month extension to the support for home energy bills.
Higher mortgage rates have added further pressure for new home buyers and those remortgaging. It’s welcome news that a very high proportion of those with mortgages are on 5-year fixed rate deals but as they come off these deals the increased monthly payments will hit monthly budgets.
Lenders and brokers are working with those who face material increases in mortgage payments to come up with tailored solutions to ease the pressure.
Mortgage rates have fallen back to 4.5% for new home buyers. This is well down on the 6% high’s seen at the end of last year but remains more than double mortgage rates a year ago.
The housing market can withstand higher mortgage rates and we have consistently argued that sub-5% mortgage rates would not lead to big price falls and this is bearing out.
However, new buyers have 20% less buying power than a year ago. This doesn’t mean prices will fall by this much, but people will look to buy smaller homes or move to areas that offer better value for money. Others may look to inject more equity into home purchases where funds are available.
Overall, the best way to offset higher borrowing costs - and housing costs in general including rents - is to help boost household incomes, which no-one would argue against.
As a result of weaker buying power, we have seen a gentle shift in demand towards flats as the early home buyers of 2023 sought better value for money.
We expect mortgage rates to stay in the 4-5% range over 2023, so those who would like to move should not expect rates to move much lower and plan accordingly.
The big challenge in the housing market is affordability, especially for those who rent or have small deposits to put towards a home. Rents are rising fast, up 11%, which is well ahead of earnings growth, which is currently 6.7%.
Many younger households looking to buy and renters of all ages are concerned about the lack of supply and scale of recent rent increases. This is all a result of low rental supply and a lack of growth in the size of the private rented sector over the last 6 years.
As well as focusing on jobs and growth, it’s important that the government continues to focus on growing housing supply through the development of new homes of all tenures. Only by improving supply can we ease the affordability pressures felt across the market.
How does the Spring Budget affect household budgets?
Inflation has peaked and is set to fall to 2.9% by the end of 2023, said Chancellor Jeremy Hunt in his Spring Budget, as he unveiled plans for help with fuel bills, childcare costs and pensions.
“The UK will not enter a technical recession this year,” said Chancellor Jeremy Hunt in his Spring Budget statement.
The UK economy is set to contract by 0.2% in 2023, before heading into a growth rate of 1.8% in 2024.
The unemployment rate is also expected to be less severe this year, with unemployment rising by less than 1% to 4.4%.
And in welcome news, inflation has peaked, with the Office for Budget Responsibility reporting that it will fall back to 2.9% by the end of 2023.
So how does the Spring Budget affect household budgets?
Free childcare for all under 5s
Acknowledging that the UK has one of the most expensive childcare systems in the world, Hunt pledged free childcare for all under 5s.
‘Nearly half of non-working mothers say they’d prefer to work if there was suitable childcare', said Hunt.
'But for many a career break becomes a career end.’
In eligible households where all adults are working at least 16 hours a week, 30 hours of free childcare will be provided for children aged 9 months or over, starting when maternity or paternity leave ends.
The plan is set to be introduced in stages:
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From April 2024, working parents of 2-year-olds will receive 15 hours of free childcare
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From September 2024, this will be expanded to all children aged 9 months or over
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From September 2025, every parent will have access to 30 hours of free childcare a week
How will it happen?
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Childminders are to be offered incentive payments of £600 for signing up to the profession, rising to £1,200 for those who sign up through an agency
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Nurseries will also be given more flexibility in how they operate, with minimum child to staff ratios raised from 1 to 4 to 1 to 5 - as is currently the case in Scotland
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Parents on Universal Credit who want to move into work or increase their hours will have their childcare costs paid upfront by the government, with £951 allocated for one child and £1,630 allocated for two
By September 2026, the government plans for all schools to offer wraparound care from 8am to 6pm.
Energy price guarantee to remain for a further 3 months
The energy price guarantee will remain at £2.5K for the next 3 months, ahead of an expected fall in energy prices in July, saving the average family £160.
And for the 4m households on pre-payment meters, charges will be brought inline with comparable direct debit charges.
“The energy premium paid by our poorest households is coming to an end.,” said Hunt.
Hunt also said the UK needs to focus on ‘domestic sources of energy that fall outside Putin or any autocrat’s control.'
He added: ‘Electricity generated by renewables has increased from 10% to 40% but we need another critical source of cheap and reliable energy - and that is nuclear.
‘It’s vital to meet our Net Zero obligations.’
So nuclear energy will now be classed as environmentally sustainable, giving it access to the same investment incentives as renewable energy.
Fuel duty frozen
The planned 11p rise in fuel duty will be postponed as ‘now is not the right time to up-rate fuel duty inline with inflation’.
So for a further 12 months the government will maintain the 5p cut and freeze fuel duty.
Employment
There are currently 1m vacancies in the economy and 7m adults of working age who are not in work.
Hunt said the government wants to remove the barriers that stop people who want to from working.
In a reform of disability benefits, Hunt said the government plans to abolish the work capability assessment, so that claimants can keep their benefits and still work.
He also announced plans for those aged over 50, ‘experienced workers’, to encourage the 3.5m people who are of pre retirement age but who are not currently part of the labour force back to work.
Pensions
The pensions annual tax-free allowance is set to be increased by 50% from £40K to £60K, while the lifetime allowance will be abolished.
The government believes this reform will stop over 80% of NHS doctors from receiving a tax charge.
Is a regeneration project planned near you?
Hailing Canary Wharf and Liverpool Docks as ‘2 outstanding regeneration projects that transformed the lives of thousands of people’, Hunt announced a further 12 new investment zones for:
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West Midlands
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Greater Manchester
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Liverpool City
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North East
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South Yorkshire
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Tees Valley
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West Yorkshire,
With 4 planned for
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Scotland
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Wales
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Northern Ireland
Transport
A further 8.8bn us set to be invested in sustainable transport, while the government increased the ‘pothole pot’ by £200m to £700m, with £320m allocated to Scotland, £180m for Wales and £130m for Northern Ireland.
And finally, 'the Brexit pubs guarantee'
For ‘the great British pub’ Hunt increased draught relief, meaning the duty on alcohol will be up to 11 pence lower than that sold in supermarkets.
‘British ale is warm but the duty on a pint is frozen,’ he said.
Key takeaways
- 30 hours of free childcare a week from September 2025
- Energy Price Guarantee extended for 3 months
- Fuel duty frozen for 12 months
- Pensions: annual tax-free allowance increased by 50% from £40K to £60K and the lifetime allowance to be abolished
Buy-to-let mortgage choice recovers
The number of different deals available to people renting out a property reaches its highest level since before the mini-Budget.
The number of buy-to-let mortgages available has reached its highest level since before the mini-Budget as the market continues to recover.
A total of 2,400 different deals are available to people buying a property to rent out, a level last seen in July 2022, according to financial information group Moneyfacts.co.uk.
The average interest rate charged on fixed rate buy-to-let mortgages has also continued to fall.
The typical cost of a two-year fixed rate deal is now 5.81%, while interest on a five-year one has dropped to 5.72%.
Rachel Springall, finance expert at Moneyfacts.co.uk, said: “It is encouraging to see buy-to-let product choice gradually recover from the shock surrounding the fiscal announcement.”
Why is this happening?
The choice of buy-to-let mortgages for landlords fell sharply in the wake of the mini-Budget as lenders pulled their deals to reprice them.
This was because former Chancellor Kwasi Kwarteng’s announcement led to a steep increase in government borrowing costs, which in turn impacted the rates lenders pay to borrow money for fixed rate mortgages.
The average cost of the deals that were available also shot up to more than 6%.
But Chancellor Jeremy Hunt reversed most of the mini-Budget measures, helping to restore confidence and reduce government borrowing rates.
As a result, lenders have gradually relaunched their mortgage ranges and reduced the interest rates they charge, despite the Bank of England’s Bank Rate actually increasing during the same period.
What should I do if I need to remortgage?
Unfortunately, despite the fall in interest rates, if you are coming off a two-year or five-year fixed rate deal you are still likely to face a significant increase in your monthly repayments.
For someone borrowing 60% of their property’s value, the average two-year fixed rate mortgage was 2.14% in March 2021, compared with 5.39% now, the equivalent of £542 a month more on a £200,000 interest-only mortgage.
The difference is slightly less for five-year deals, with these rising from an average of 2.74% in March 2018 to 5.22% now, which would increase monthly payments by £413 on a £200,000 interest-only loan.
But these are only average rates, and there are better deals available if you shop around.
Springall said: “The drop in average buy-to-let rates appear more subdued than seen within the residential mortgage sector, but lenders have made moves to entice new business.”
What’s the background?
Higher interest rates not only make a mortgage more expensive to service, they also make it more challenging to pass lenders’ affordability tests.
Lenders use a different affordability test for buy-to-let mortgages compared with mortgages for your main home, known as the Interest Cover Ratio.
Under this test, the rent you receive from the property must be the equivalent of between 125% and 145% of your monthly mortgage interest payment.
If your rent isn’t high enough to meet this affordability test, some lenders will allow you to do something called ‘top slicing’, under which they include some of your income in their affordability calculations.
That said, average rents have also risen at their highest rate for a decade, according to our latest Zoopla Rental Index.
The typical cost of renting a home increased by 11.5% in 2022 to stand at £1,118, with London seeing a 16.1% increase, while in Scotland rents rose by 12.5%.
Key takeaways
- A total of 2,400 different deals are available to people buying a property to rent out
- The typical cost of a two-year fixed rate deal is now 5.81%, while interest on a five-year one has dropped to 5.72%
- However in March 2021, the average two-year fixed rate mortgage was 2.14%, while in March 2018, the average five-year fixed rate mortgage was 2.74%
How much should I reduce my asking price to achieve a sale?
Reductions in asking prices to align with price-sensitive buyers are a common occurrence right now but don't reduce yours by too much too soon....
Reductions in asking prices to align with price sensitive buyers are a common occurrence right now.
Individual property reductions will vary according to each property type, so be sure to ask advice from your agent.
But don’t reduce your asking price by too much too soon, as demand picks up around Easter and the value you get from your home will unlock your next move.
Prices are adjusting across the market, so if you’re selling, it’s heartening to know that the home you want to buy is likely to be reduced in price too.
Asking price reductions - a means to achieve a sale
Cost-of-living pressures and increasing mortgage rates have caused buyer demand to decline in recent months.
The buying power of the average home buyer shrank by a fifth in 2022. Anyone serious about selling their home this year needs to take this shift in buyer circumstances into account and be realistic about how they price their property.
Right now, 4 in 10 properties listed on Zoopla have undergone price reductions of at least 1% and sellers are increasingly working with agents to adjust their prices and attract buyers.
Asking price reductions in February
How much sellers are willing to cut their asking prices by depends on personal circumstances and their local housing market.
The price achieved will ultimately dictate what the seller can buy next.
Last month, over a quarter of sellers opted for larger adjustments, reducing asking prices by 5% or more. This shows us that motivated sellers are open to more serious discounting.
These reductions will naturally equal different monetary values in different areas of the country.
Nationally, we see sellers are typically cutting asking prices by £10,000 to £15,000.
In London, where house prices are higher, sellers adjust their asking prices by £25,000 to £30,000 on average.
In more affordable parts of the country, such as the North East, adjustments between £5,000 and £10,000 are the most common.
Asking price reductions most common in southern England
We are seeing sellers across the country cutting their asking prices.
But we’re also seeing that asking price adjustments are most common in southern England. In London, almost half of properties currently listed on the market have had a price decrease, followed by 44% in the South East and 42% in the East of England.
Average property prices in these regions are much higher than elsewhere in the UK. That means that the impact of higher mortgage rates is bigger, hitting buyer demand harder.
This creates conditions where sellers need to act more decisively to achieve a sale.
Which property types are impacted?
Asking price adjustments are impacting flats to a greater extent than houses. One in 5 flats listed on Zoopla in February had an asking price reduction of at least 5%, while only one in 6 houses had a similar price change.
In recent years, demand for flats has been lagging behind demand for houses.
Apartment owners understand that pricing competitively is even more important for this property type if they want to achieve a sale.
This is becoming more important as buyers are becoming more price-sensitive.
Is reducing an asking price a bad thing?
Not necessarily. Asking price adjustments are happening across the board. As a downsizer or upsizer, this means that repricing will affect not only the property you are selling but quite possibly the one you may be looking to buy next.
A change in asking price can speed up the selling process.
Only 7% of listings that have undergone a price reduction this year have remained unsold by the end of February.
For a third of those properties, a modest adjustment of up to 5% was all they needed.
When adjusting asking prices, timing is important as well. Historical data shows buyer demand picks up around Easter.
Our advice for serious sellers looking to sell in March is to have an honest conversation with your agent to ensure your property is priced at the right level for the current market.
It is welcome to see evidence of greater realism from sellers on pricing. Many sellers will see that recent property value gains equip them with a buffer they can use to unlock sales.
This shows that sellers have got room for manoeuvre without a significant loss to equity that would have been built over many years.
Key takeaways
- Some 4 in 10 properties currently listed on Zoopla have their asking price reduced by at least 1%
- The most common reduction is between £10,000 to £15,000
- Those selling property in the more expensive regions of southern England are more likely to drop their asking price
- Asking price cuts are more common for flats than standard family-size houses
- Widespread reductions show greater realism from sellers on pricing, possibly thanks to the large capital gains made during the pandemic
Foxtons CEO Guy Gittins: my advice for sellers in 2023
As buyers return to market following last year’s mini budget shocker, what should sellers be doing to make sure their homes are the ones that are snapped up?
As we transition to a buyers’ market, we asked Foxtons Chief Executive Officer Guy Gittins to share his advice for sellers in 2023.
Is now a good time to sell your property?
It’s always a good time to sell a property, whether the market’s going up or down. It just depends on what your onward move is.
If you’re moving up to a larger property and the market’s come off by 5%, then it really is a great time to be able to make that move.
But for the couple living in that large family home, who might want to downsize to a smaller property, that becomes a little bit less attractive.
If you are planning on downsizing, is it a good idea to wait?
It is so much more important, if you can afford the move, to be in a property that's right for you and your family.
I’ve seen way too many people holding off a move because they’re trying to play the market and ultimately what happens is that they stay in a property that’s no longer suitable for them for too long.
The joy and benefit of being in the right property for you and your family, in my opinion, far outstrips any financial gain on a 5% trade if you’re trying to play the market.
Very often people will miss that moment anyway because nobody can call the top or bottom of the market, it’s very difficult.
And when you’ve stayed in a property for over 10 years, these small movements in prices year-to-year become totally irrelevant.
What are your top 3 tips for sellers right now?
1. It’s all about correct pricing. Take your agent’s best guidance on pricing, because they absolutely know the market and they’ve got the data on it.
2. Presentation is absolutely critical.
3. And plan your onward purchase. Because if you’re selling in order to buy, it’s very advisable to be doing both searches at the same time.
Once you go under offer, you don’t want to be holding that process up, particularly if you’re looking for a forever home.
And the last thing you want to be doing is trying to find that in a four week window, it just doesn’t work like that.
Are you seeing more of a typical profile of buyer at the moment? For example first-time buyers or downsizers?
Not at all, we’re seeing overseas buyers, first-time buyers, needs-based buyers, the spread of buyers has pretty much stayed the same as last year.
Are you seeing less demand from buyers at the moment?
As soon as we had the mini budget at the start of Q4 last year, buyer numbers dropped dramatically very quickly. In some instances by 50%, compared to what we were seeing before the mini budget.
But what’s been very interesting is that for the first couple of months of this year, those numbers have recovered considerably and we’re really seeing a large number of new buyers coming back into the market.
There’s a realisation that interest rates are not going to be 6% - 7%.
The swap rates between the banks - and therefore the actual interest rates that somebody would be paying - have come down considerably from the last couple of months of last year and that’s absolutely encouraging people.
What impact will mortgage rates have on the property market this year?
Bearing in mind how banks have had to be structured following the financial crisis, most mortgages over the last five years have been stress tested at 3% to 4%.
So when people are coming up to their next mortgage or their next move, that has already been factored into the market.
And while it might not be as comfortable and people might not have as much free cash, we’re not seeing forced sellers coming to the market, desperate to exit their property because they can’t afford their mortgage rates. That’s absolutely not happening.
And that’s because of the very sensible policies that were put in place following the global financial crisis.
We’re not seeing a crash in any way, shape or form.
What we are seeing is some of that really toppy part of the market, the froth from the first three-quarters of last year (which saw 5% gains from 2021), is now coming off of the market.
But we’re seeing a lot of activity, buyers are coming into the market this year, viewing numbers are high and we have a solid outlook for the rest of this year.
What's happening with asking prices at the moment?
We are seeing a higher volume of price adjustments in the marketplace.
But when a property’s been on the market for a while and it has that price adjustment, it’s stimulating a lot of interest.
It’s about being correctly priced against where the market is trading. That’s the key.
At Foxtons, because we’ve got access to so much data, we’re able to price very accurately, stimulate activity and get you the best price for your property.
That is the value that agents bring, having access to that vast amount of data, so that we advise clients accordingly.
What can sellers do to make their home the one buyers want?
With anything in life, it’s all about first impressions and they really do matter. So the presentation of your property as it appears to the outside world is really, really important.
The photos that the agent takes are absolutely essential to be able to capture everything that’s special about your property.
That’s the first hook as your window to the world to engage and create some interest.
And when the viewings actually start, it’s really important that the home is presented in the very best possible way.
It might sound old school, but decluttering is essential. Buyers want to see the property and all of the space.
If it’s looking a little bit tired, it’s surprising what a lick of paint can do to an entrance hall, a living area or a master bedroom, it really can lighten the entire experience.
Always have the curtains open if you can, you want to flood the property with as much light as possible.
And make sure anything that makes the property look like it’s in poor condition has been rectified before viewings start because that might turn some buyers off.
If they see a big patch of damp in the corner, they may be put off by that. But if it can be dealt with ahead of marketing, then that’s something that incoming buyers don’t have to worry about.
Can it actually add value to a property if sellers take these steps?
For sure. And we would recommend to anybody selling a property to ensure they have some carefully chosen furniture to present the space well, so people can see the lifestyle that they may be able to have.
And finally, what are your top 3 tips for buyers in 2023?
1. Educate yourself about your chosen area. No matter what the market is doing, you’ve got to know where things are trading at and the type of property you can genuinely afford.
The more defined your search, the more educated you’ll be about that market. And when you see the right thing, you’ll be able to press the button on it.
2. Work with your agent and not against them. The best agents are able to hold your hand as your search evolves. And everybody’s search evolves.
A very small percentage of buyers actually buy in the area that they first started looking in, at the price they first started looking for, with the property attributes they initially wanted.
As their search evolves, their attributes start to change and the best agents really can help you with that process.
3. Don’t expect an offer of 20% below asking price to be accepted, that’s not where the market is at. You’ve got to be realistic about going out there.
If you’re making offers that are consistently not being accepted, you have to track and understand where the market is.
It might be that your expectations are far below the reality.
We’ve seen an uplift in buyer numbers coming back into the market, far above what we saw at the end of last year.
This is starting to pick up pace.
Key takeaways
- Plan your onward move as soon as you plan to enter the market, to ensure you don’t hold up your sale and lose your offer
- Decluttering, giving your home a fresh lick of paint and rectifying any problems before putting up the For Sale sign can all add value to your property
- More people are making price adjustments, but when you’ve stayed in a property for over 10 years, these small movements in prices year-to-year become irrelevant
Competition investigation launched into the housing sector
The Competition and Markets Authority is looking into the cost and availability of housing and the experience of renters.
The Competition and Markets Authority (CMA) has launched an investigation into the cost and availability of housing in England, Scotland and Wales.
The market study will look into whether housebuilders are failing to deliver the homes people need at sufficient scale and speed.
The CMA will also start a consumer protection project looking at the experience of those living in rented accommodation and whether more could be done to help landlords and intermediaries understand their obligations.
Sarah Cardell, chief executive of the CMA, said: “The quality and cost of housing is one of the biggest issues facing the country.
“If there are competition issues holding back housebuilding in Britain then we need to find them. But we also need to be realistic that more competition alone won’t unlock a housebuilding boom.”
What will the CMA look at in the housebuilding sector?
The CMA’s market study into housebuilding will focus on four key areas.
The first area is housing quality, such as whether builders are delivering the sort of homes that buyers and communities need, as well as looking at the fairness of estate management fees charged for unadopted roads and other amenities.
It will also look at land management and whether developers’ practice of ‘banking’ land, either before or after receiving planning permission, is anti-competitive.
Other areas include the extent to which local authorities oversee the delivery of homes, and the requirements for builders to include affordable homes.
Finally, it will consider innovation and whether there are circumstances holding back housebuilders from adopting new building techniques or moving towards more sustainable, net zero homes.
What will the CMA focus on in the rented sector?
The consumer enforcement work in the rented sector will focus on the end-to-end experience from a tenant’s perspective, including finding somewhere to live, renting a property, and moving between homes.
It will also identify any consumer protection issues that may arise, looking at the relationship between tenants and landlords, as well as the role of intermediaries, such as letting agents.
What happens next?
The CMA is able to use compulsory information-gathering powers to examine the housing market to see why it may not be working well for consumers.
The process will enable it to develop a deeper understanding of how housebuilders decide to deliver new homes and their interaction with local authority housing targets.
The study will also consider the issues faced by smaller, regional house-building firms.
Market studies can lead to a range of outcomes, including making recommendations to the government to change regulations or public policy, encouraging businesses to self-regulate, taking consumer or competition law enforcement action against firms, or conducting a more in-depth study.
The CMA must publish its report into the market setting out its findings and any action it plans to take within 12 months.
For the rented sector, the CMA will report on its initial findings and proposed next steps this summer.
Key takeaways
- The Competition and Markets Authority (CMA) has launched an investigation into the cost and availability of housing
- It will look into whether housebuilders are failing to deliver the homes people need at sufficient scale and speed
- It will also look at the experience of people living in rented accommodation
Sellers accept average discounts of £14,100
However, homes grew by £42,000 in pandemic, suggesting sellers are having to forgo around 33% of their pandemic gains in order to achieve a sale.
On the surface, the picture for those looking to sell a home this year might look a bit bleak when compared with the flurry of buying activity that happened over 2021 and 2022.
But it’s possible to take two opposing views on the sales market right now.
Glass half-full or half-empty?
The glass-half-empty view is to look at trends on a year-on-year basis, comparing this year to the red-hot market conditions of last year.
The glass-half-full view compares the current market to the pre-pandemic years of 2017 to 2019, when activity levels and house price growth were steadier.
However, when comparing this year’s sales activity to last year’s, the number of sales taking place is around half of what was seen in 2022, because it was an exceptionally buoyant year.
The reality is that current market conditions are now simply more aligned with those of the pre-pandemic years.
Sellers accept average discounts of £14,100 from asking prices
The difference between a seller’s initial asking price and what they actually end up selling for is now widening to the largest gap seen for five years.
While the number of sales taking place is recovering, sellers are having to accept larger discounts to their asking prices in order to secure those sales.
That said, negotiating down from the asking price was normal practice before the pandemic boom.
Our latest data shows that the average seller is offering a 4.5% - or £14,100 discount.
That’s currently larger than the average discount seen in pre-pandemic years.
It reflects the rapid transition from a red hot sellers' market - where most buyers had to pay the full asking price over much of 2021 and 2022 - to a buyers' market, where there’s more room for negotiation on price.
Putting this into context, the average UK home grew by £42,000 in value during the pandemic, suggesting sellers are having to forgo around 33% of their pandemic gains in order to achieve a sale.
Sales going well in affordable markets
Overall, sales volumes are lower year-on-year across most of the UK.
But in the more affordable markets, such as the North East and Scotland, the number of sales taking place is up on pre-pandemic levels.
That’s because higher mortgage rates have less of an impact on demand in lower-value markets.
In London sales are also 4% higher than their pre-2020 levels.
But that’s not because it’s an affordable market, rather it’s down to the fact that house prices in the capital have risen at a much slower rate than the rest of the country since 2016.
This makes it appear better value for money to buyers, which is supporting sales.
Meanwhile, in the Midlands and southern England, sales volumes are going down to 9% lower than the levels seen in the pre-pandemic period.
What’s going to happen in the rest of 2023?
Sellers of every property type across the UK will need to be realistic when pricing their homes in order to secure a sale.
However, homes gained so much value in the last two years that it will provide a buffer for those who need to drop their asking price.
Working from home, increased retirement and high immigration will continue to stimulate the demand to move home, while cost-of-living pressures will exacerbate the need for some.
We expect 1.1m homes to sell this year and the market is still on track for a soft landing with modest price falls of up to 5%.
Key takeaways
- Sellers are now having to accept an average 4.5% discount to their asking price to achieve a sale, the highest for 5 years
- The average discount to asking price is £14,100, meaning sellers are having to forgo a third of their pandemic house price gains
- We’re now returning to a buyers’ market where negotiation on asking price is to be expected