Frustrated first time buyers may have to continue renting

New data from Zoopla suggests that growing concern about the cost of living crisis and in particular rising interest rates may oblige more first time buyers to put purchase plans on ice.

The latest house price index from the portal 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 especially for first time buyers and home buyers in southern England.

The impact of higher mortgage rates over the remainder of 2022 mean that the income needed by a first time buyer to purchase a home will increase by an average £12,250 as mortgage rates are expected to reach 4.0 per cent. As inflation and interest rates continue to climb, people will need a 10 per cent 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. 

Zoopla warns that 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. 

In terms of capital appreciation, the portal says prices continue to grow with the average home having increased by 8.3 per cent 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 per cent. 

Demand has fallen to under a third of levels seen in spring, however, although it’s still above the five-year average. 

First time buyers are now the largest buyer group accounting for up to 35 per cent 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.

The portal adds: “Many may be surprised that the property sales market is not weakening faster given the cost of living crisis, rising base rates and sharp drop in consumer confidence. However, as homebuyers often tend to be higher-income households with more disposable income, it’s likely they’re not yet feeling the effects of increased living costs. Lower income households however will already be affected as they tend to rent or own their home outright and spend more of their disposable income on essentials and utilities.”

Zoopla’s director of research, Richard Donnell, says: “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.”

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