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The property market is broken, and nobody is quite sure how to fix it.
In the past decade, we’ve seen new homebuying initiatives, tax rises, tax cuts, a building scheme that resulted in no homes being built, and 13 different housing ministers.
Despite these interventions, mortgage rates are now three times higher than two years ago, houses are taking longer to sell and the cost of renting is soaring as landlords leave the market.
So how did we get here, and is there light at the end of the tunnel for renters, homeowners and landlords?
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Buying your first home is a big milestone, but for many renters the chances of getting on to the property ladder might seem slimmer than before.
House prices have risen by 64% in the past decade, comfortably outstripping wage growth (45%). The average price paid by first-time buyers in Great Britain is £240,000, meaning you'd need a deposit of at least £12,000 to get a 95% mortgage.
Rent rises and high inflation have made saving more difficult. Data from the Office for National Statistics (ONS) shows that rents increased by 6% in the year to November 2023. Further rises are forecast.
However, the biggest barrier to homeownership is mortgage rates, which have skyrocketed since the mini-Budget in September 2022. The cheapest 90% two-year mortgage is now just below 5%, compared with 1.6% in early 2022.
This means first-time buyers may need to borrow for longer periods. ‘Marathon’ mortgages of 35 or even 40 years are becoming more common.
Banks have also been extending maximum repayment ages to open deals up to more borrowers, with some now going as high as 80.
First-time-buyer affordability is an issue successive governments have tried, and largely failed, to crack.
There have been some qualified successes. The Help to Buy scheme, which offered 20% equity loans to first-time buyers purchasing new-builds, resulted in 328,000 people buying their first home between 2013 and 2023.
However, the scheme was plagued by accusations that it inflated house prices. Our investigation in 2020 found one in seven buyers who resold properties did so at a loss.
In 2021, the government capped the prices of houses sold under the scheme.
Tax and mortgage changes made some impact. Increases in the stamp duty threshold for first-time buyers in 2017 and 2022 cut the upfront cost of buying a home. And the mortgage guarantee scheme, launched in 2021, encouraged banks to bring back 95% mortgages.
But other housebuilding schemes have been less successful. In 2015, the government said it would build 200,000 ‘starter homes’ at a 20% discount for first-time buyers. In 2019, the National Audit Office found that no homes had been built.
Finally, the First Homes scheme, launched in 2021, aimed to provide 10,000 homes a year for first-time buyers and key workers at a 30% discount. In the 2022-23 financial year, 1,058 First Homes were completed
In the latest episode of the Which? Money Podcast, we delve into the challenges facing the property market in 2024, including expert mortgage advice from David Hollingworth of L&C Mortgages.
For tenants, the upcoming Renters Reform Bill will introduce greater protections, including measures on regulating rent rises, the right to keep pets and a new ombudsman to resolve disputes. However, the abolition of ‘no fault’ evictions has been delayed due to issues with the court system.
For those looking to buy, house prices are likely to fall slightly, after dropping by around 1% in 2023.
Lower inflation should encourage the Bank of England to cut the base rate. This may result in cheaper mortgages, although significant falls are unlikely.
And with a general election looming, prospective first-time buyers will be hoping for a rabbit to be pulled out of the hat in the Spring Budget in early March.
I’ve advised on everything from the different types of mortgages to whether they really need to get a house survey (always yes).
But doing it yourself is a different matter. I recently got married and we’re now looking to get onto the property ladder. While Danielle shops around on Rightmove for houses we can’t afford, I’ve been trying to get the financials sorted out and – even knowing what I know – it’s eye-opening.
With our collective earnings, we can theoretically borrow enough for a nice two-bed terraced home within commuting distance of London.
Unfortunately, sky-high mortgage rates mean that, in most cases, the projected repayments would be well beyond our means – think cutting out food entirely rather than just avocados. Unless rates drop, we’ll need to lower our budget and make compromises – my dream of having a garden to host barbecues may have to get the chop.
Amid the doom and gloom, I take some comfort in the fact that we’re in a buyer’s market, which could yet open up some opportunities.
In the meantime, I’ll be keeping a daily eye on mortgage rates, the latest price predictions and that (definitely not-at-all-dodgy) house we’ve seen online that keeps getting reduced.
The property market is in a slump. HMRC data shows that sales are down 22% year-on-year, while Rightmove says homes are taking an average of 66 days to go under offer, with 39% being reduced in price.
Expert forecasts say that house prices will drop marginally this year. If you’re looking to sell, you’ll have to be realistic with your asking price, as buyers will aim to knock you down. Zoopla says buyers achieved an average discount of 5.5% on asking prices in November.
Around 1.5 million households are due to remortgage in 2024, and most will face the pain of much higher rates.
If you took out a fixed-rate mortgage two years ago, you might have got a rate of around 1-2%. Today, it will be around 4-5%.
This difference could add hundreds of pounds a month to your repayments. If you’ll struggle to pay, contact your lender to find out what support it can offer.
When remortgaging, think about how long to fix for. Five-year deals are the cheapest, but with rates trending downward, a two-year deal may be prudent. If you’re thinking of moving in the medium term, check if your mortgage has early repayment charges, and take advice from a broker if you’re unsure.
High rates and the cost of living are making it difficult for homeowners to move up the property ladder. This is a particular problem for ‘second-steppers’ – families hoping to move to larger homes.
Land Registry data shows the average difference in cost between a semi-detached and detached home is now £176,000. A decade ago, the gap was £103,000.
When rates were low, it was easier for homeowners to make overpayments and borrow more to move up the ladder, but many will now have to stay put.
Affordability issues are also having a knock-on effect on people looking to downsize from bigger homes to smaller properties.
Larger homes are more expensive to buy and run, so may be on the market for longer, and desirable homes for older people can be increasingly hard to find.
For example, the National House Building Council says that just 228 bungalows were built between July and September 2023.
One of the main reasons people downsize is to release funds for use in later life or to help their children or grandchildren.
But this money is being eaten up by high costs. Data from the comparison site Reallymoving shows that the average cost of moving is £14,500.
A recent survey by Hargreaves Lansdown found that a quarter of homeowners want to downsize in retirement. Of those who don’t, 22% said it was too expensive and 13% blamed the cost of stamp duty.
A stamp duty cut for downsizers has long been mooted. Along with the potential scrapping of inheritance tax, this may be something to keep an eye on ahead of a general election.
Leaseholders should finally benefit from the Leasehold and Freehold Reform Bill coming into force this year.
The first set of reforms will include a ban on almost all houses being sold as leasehold, the introduction of longer lease terms and cheaper lease extensions.
A consultation on scrapping existing ground rents is ongoing.
The changes should be a major step in bringing an end to a leasehold system beset by huge ground rents, high service charges and freeholds being sold off to third parties.
‘It was ample for our needs at the time – we could have afforded more but wanted to buy within our means given the uncertainty with the economy,’ Adam says.
The couple have since welcomed a son and a cocker spaniel to the family. ‘Suddenly, there isn’t enough space,’ Adam says.
Their hopes of moving have been scuppered by high prices. ‘If you want to move to a three or four-bedroom detached house, you’ll need to stump up an extra £150,000 to £200,000 – the jump is ridiculous’.
Soaring mortgage rates have exacerbated the issue. Adam says: ‘Before the mini-Budget in 2022, rates were very low, so it might have been possible to make the jump. Now, though, it’s a higher rate on a bigger sum of money, and that few hundred pounds extra a month has turned into a thousand pounds or more. This just isn’t possible with the cost of living, energy bills and childcare’.
Adam plans to bide his time for now: ‘The good thing is that house prices aren’t going up any more, but mortgage rates have to come down for us to have any chance of moving. If that happens, we might be able to consider moving once we no longer have to worry about childcare payments.’
Over the past decade, ‘accidental’ and professional landlords have faced a series of tax and regulatory changes that have eaten into their profits and triggered a huge sell-off of properties.
Research by the estate agent Savills found that net profits for landlords fell below 4% in the first quarter of 2023 – the lowest figure recorded since 2007.
Savills concluded that there was a ‘very real’ risk that landlords with bigger mortgages would sell up, further depleting the number of rented homes available.
This great landlord sell-off has been happening for some time. Data from Hamptons shows landlords have sold 294,000 more homes than they’ve bought since 2016. Buy-to-let sales have outweighed purchases in eight consecutive years, as shown in the chart below.
In 2015 and 2016, landlords faced a double whammy of tax changes that have shaped the rental sector ever since.
First, and most significant, was the phasing out of mortgage interest tax relief. Landlords could previously offset 100% of their mortgage interest payments when calculating profits. This was phased out between 2016 and 2020, before being replaced by a flat 20% credit, leaving some landlords out of pocket.
The government then introduced a 3% stamp duty surcharge on purchases of additional properties such as buy-to-lets. This added thousands of pounds to the cost of buying an investment property.
These plans were designed to cool the buy-to-let market – and in that respect they worked. But MPs have questioned whether the number of properties in the rented sector has been reduced too far. Hamptons estimates that there were 43% fewer rented homes available to tenants in 2023 than in 2015.
The Renters Reform Bill should come into force later this year. The Bill includes reforms such as a ban on landlords refusing tenancies to people who receive benefits or have children or pets, and the introduction of a Decent Homes Standard.
The Bill is designed to make the rented sector fairer, but one major issue remains unresolved. The government has long been seeking to ban Section 21 no-fault evictions, but this has now been delayed indefinitely, creating further uncertainty for landlords and tenants.
The government’s recent U-turn on energy rules has also caused consternation. The plan to require all new rentals to achieve Energy Performance Certificate ratings of ‘C’ by 2025 and existing rentals to do so by 2028 was scrapped in September. A survey by Shawbrook Bank found that nearly half of landlords had already spent money preparing for the changes.
The red tape continues to build up. Mandatory licensing schemes for landlords operating Houses in Multiple Occupation (HMO) have long been in force, but a growing number of councils have introduced selective licensing schemes over the past few years.
The rules can vary but may include landlords being required to sign up to a code of conduct or passing a ‘fit and proper person’ test.
This raft of changes has resulted in buy-to-let becoming increasingly professionalised, thereby creating challenges for ‘accidental’ or part-time landlords.
Data from the English Private Landlord Survey (2021) shows that 53% of landlords without mortgages and 33% of those with mortgages only have one buy-to-let property.
Landlords with mortgages are being stung by high rates. The average buy-to-let mortgage rate is currently around 6%, according to Moneyfacts. This is almost double the figure recorded two years ago.
As with the owner-occupier mortgage market, costs have begun to fall, but it’s unlikely that any drops will have a significant effect in the short term. This means landlords will continue to see their profits squeezed, resulting in higher rents and more sell-offs.
Many are cutting their losses, exacerbating rental shortages. ‘The biggest thing to hit us was Section 24,’ he said. This removed a landlord’s right to deduct their mortgage interest relief (often the biggest cost) from taxable income in 2017, meaning they’re effectively taxed on turnover rather than profit.
Mr Sanders said it wasn’t an issue until interest rates soared after the pandemic. ‘It’s pushing rents up for tenants, landlords are worse off and because of that, more and more landlords are selling up. Of course, first-time buyers are buying some of those properties so there are fewer rental properties on the market just at a time when more people need to rent.’
Dave said he had to sell one of his properties last year as it was now unprofitable, and he plans to sell more for the same reason.
Meanwhile, proposals to remove Section 21 have him worried. He told us that the no-fault eviction clause saves a lot of headaches for landlords who want to remove a problem tenant quickly and without the cost of going to court.
Out of more than 100 tenants over the years, he’s only had to resort to this three times. Had he taken another route, such as a Section 8 eviction notice, he said that he would have waited months to go to court – all the while losing rental income.
This article originally appeared in the March issue of Which? Money.
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