Each year we undertake an exercise to value the whole of the UK’s housing stock, in order to get a better understanding of how the nation’s housing wealth and its distribution has changed. Then, once each decade, feverish anticipation builds amongst research analysts as a new set of census data allows us to recalibrate our analysis.

In particular it enables a reevaluation of the nation’s housing costs – highly topical given the environment of strong rental growth and the 11 successive increases in the bank base rate.

THE DISTINCTION BETWEEN HOUSING COSTS AND VALUE

Earlier in the year our analysis revealed that the total value of the nation’s housing stock hit £8.67 trillion by the end of last year, a figure which increased by £1.65 trillion (+23 per cent) over three years because of the pandemic-induced mini housing boom. This can be broken down by outstanding mortgage debt, standing at £1.66 trillion, and housing equity, now exceeding £7 trillion for the first time.

In comparison, our calculations reveal that the nation’s housing costs rose by a significantly lower +9.7 per cent over the same three year period, from £161 billion in 2019 to £177 billion in 2022, over half of which was made up by rents paid in the private and social housing sectors. 

COST INCREASES LIMITED IN 2022

These housing costs have partly been kept in check by the fact that rental values only gradually feed into rents paid, when reviews are conducted and properties are re-let on the open market. Overall costs were also capped by the growth in households who own their home outright, as more who benefitted from the growth in homeownership before the turn of the millennium paid off their mortgage over this time period.

But, importantly, smaller increases to housing costs reflect the extent to which households have been insulated from rate rises, due to the increased use of longer, fixed-rate mortgages over the past seven years or so.

Only an estimated 1.7 million mortgages were on a variable rate in 2022 out of the 10 million or so outstanding owner occupier and buy to let mortgages.

WHY MORTGAGES MATTER

In 2022 an estimated 1.03 million mortgage holders came to the end of their fixed rate, the bulk of which did so prior to the sharp increase in interest rates which we saw in the last quarter of the year. 

The number coming to the end of their fixed rate deal will this year rise to 1.36 million, before falling back to 1.18 million in 2024. With the mortgage markets having settled down somewhat since the turmoil of the last three months of 2022, the increase in mortgage costs for these households will be less than they might have feared. But they will still be significant.

THE £100 BILLION QUESTION

Indeed, we expect the total mortgage interest liability to rise by just shy of £10 billion next year – from £33.7 billion to £43.5 billion. More than 90 per cent of outstanding mortgages are on a capital repayment basis – and in 2022, the regular capital repayments totaled another £55.4 billion. 

All of this means we expect total mortgage costs to rise by around 8 per cent in 2023 to around £96 billion. However, the effect of that rise will be unevenly distributed.

DIVIDED LOYALTIES

Those whose fixed rate deal still has a while to run will have to keep an eye on where rates go from here in the hope that when they do come to remortgage, they will be able to do so in a more benign interest rate environment.

But, those coming to the end of afixed rate deal face an average increase in total mortgage costs approaching 30 per cent in 2023 where they are on a capital repayment mortgage (from £10,522 to £13,641 on average, but subject to wide regional variation).

As a result, the distinction between cash and mortgaged buy to let investors will be even more pronounced, given the latter group’s higher reliance on interest-only mortgages and limitation on the tax relief they can get on higher mortgage costs.

THE GENERATION GAME

The impact of rising costs will also be felt most keenly by those in the early stages of their homeownership journey, as well as aspiring buyers who are now spending a higher proportion of their income on rent.

While rising costs loom, cash and equity-rich buyers will play a far greater role in the market.

Further information

Contact Lucian Cook