UK Housing Market Update - July 2022

House price growth slows and buyer demand eases, but supply remains constrained

House prices rose by 0.3% in June, the lowest monthly rise since September 2021. This took annual house price growth to 10.7 %, according to Nationwide. Annual price growth during Q2 slowed across all regions except the South West, North West and West Midlands. Over the year to June, the strongest price growth was in the South West (up 14.6%) and the weakest in London (up 5.9%). Prices have risen 23.6% on average across the UK since the start of the pandemic.

Slowing price growth comes alongside signs of cooling buyer demand. Buyer enquiries at a UK level fell for the first time in nine months, according to the June RICS Survey. Mortgage approvals in April were also back to pre-pandemic levels, according to the Bank of England.

Sales volumes are starting to reflect this moderated demand. The number of sales agreed in May was down by around 10% compared to May 2021, according to TwentyCi and Zoopla. Completed transaction numbers fell slightly in May, but remained 5% above their pre-pandemic norm. 

The stock of homes on the market remains constrained, but numbers are slowly increasing. There were 32% fewer homes for sale in May compared to the same month in 2019, according to TwentyCi, down from 34% in April. Savills agents have reported that stock levels increased during Q2 and we expect this to continue. Reduced demand alongside more supply and continued pressure on the cost of living will cause house price growth to continue to slow over the coming months.

The Bank of England has decided to relax its mortgage affordability tests from August, providing more flexibility for lenders and borrowers. Currently borrowers are tested on whether they could still afford mortgage repayments if interest rates were to rise by 3%. This will be reduced to 1%, which may allow some buyers to borrow more. This could open up some modest additional capacity for price growth above our current forecast, but this is being eroded by interest rates rising faster than anticipated. Other restrictions remain in place, including the limit on lending at a loan to income ratio of over 4.5. A full discussion of this change is available on our blog.

House price growth was strongest in Blaenau Gwent and Merthyr Tydfil in Wales, where prices grew on average 21.4% and 18.1% in the year to March. There were small house price falls in Southwark, down -1.5%.

Rents grew 11.8% in the 12 months to May across the UK, according to Zoopla. This was another record for annual rental growth since at least 2011, but 3-month growth has slowed by more than a third from a peak of 3.8% in November to 2.2% in May. Rental growth decelerated most rapidly in the North East and London compared to the previous quarter. Scotland and the East of England are the only regions to see a continued acceleration in rental growth.

Lack of stock to rent and high demand are allowing landlords to push up rents, with some tenants priced out as a result. Affordability is becoming more stretched, with single-person households spending 37% of gross income on rent, up from the 10-year average of 36%, and 18.5% for sharers, up from 18%, according to Zoopla.