Mortgage crisis ends the ‘race for space’

The pandemic-induced notion that houses are better than flats is reversing. Alexa Phillips crunches the numbers and looks at the impact on homeowners

The post-pandemic housing market has been turned on its head and the consequences for homeowners will be serious. During lockdowns, and immediately after, house sales were booming. Families entered into a “race for space” during the pandemic and demand for second homes soared. All seemed well for house owners as sales boomed and prices rocketed.

However, after the umpteen interest rate rises in 2022, the debt cost for higher- priced houses has shot up. Demand has fallen and the gulf between flats and houses dwindled. The Centre for Economics & Business Research, a think tank, expects this to continue and be reflected in sharper drops in prices for houses versus flats.

Such a gulf will have serious ramifications for the country’s housing market. Telegraph Money takes you through the numbers.

PRICES WILL FALL FASTER Agreed sales have been falling more sharply for houses than for flats. House sales were 16.5pc lower this month than during the same period three years ago, compared with a 1.6pc drop for flats, according to TwentyCi, an analyst.

Aneisha Beveridge, of Hamptons estate agents, said flat sales dropped to a record low last year but have generally recovered to pre- Covid levels.

The market for flats, particularly those without outdoor space, declined during the pandemic amid a “race for space” that led more buyers to seek out houses.

Andrew Wishart, of Capital Economics, a think tank, said: “A shift to remote and hybrid working allowed office workers to live further from the office and use their financial clout to buy homes with more space as opposed to paying a premium for being close to work.”

But employers have started to demand at least a partial return to the office. Visits to workplaces have returned to around 80pc of prepandemic levels, according to Google mobility data analysed by Capital Economics.

Mr Wishart said: “Employees will value a short commute more than they might have in 2020 and 2021 when office occupancy was lower.”

‘Employees will value a short commute more than they might have in 2020-21’

SPACE ISN’T IMPORTANT Houses now cost 29pc more than they did in January 2020, while flats are up 14pc, according to Capital Economics. This was most stark for detached houses, which cost 30.4pc more than three years ago, according to the CEBR.

During the first year of the pandemic areas with properties that have more outdoor space experienced the sharpest growth in prices. But during the following year there was a reversal of this trend and a return to pre-pandemic patterns. Areas with properties that have the least amount of outdoor space experienced the steepest growth in house prices in the year to March 2022.

Karl Thompson, of CEBR, said: “There’s a broader trend of workers returning to city centres, contributing to a reversal of the race for space.”

Mr Wishart said the current situation was markedly different from the one in 2008 – the last time mortgage rates climbed above 6pc. During the financial crisis it was flats that were affected by a steeper fall in prices.

He said: “The average house costs about 41pc more than the average flat now whereas in 2007 the gap was just 17pc. That’s because the cost of mortgage payments was already quite high in the lead up to the financial crisis which meant the phenomenon of buyers economising on space in order to buy had been running for some time.

“This time around the jump in mortgage rates has been far sharper, so we are only now seeing stretched affordability cause demand to shift towards less expensive flats from larger houses.”

HOUSES ARE UNAFFORDABLE Buyers were already having to stretch themselves to afford houses, but skyhigh mortgage rates have now made them increasingly out of reach. The average five- year mortgage rate is 5.8pc, while two-year deals cost 6.01pc, according to analyst Moneyfacts. A year ago they were 2.64pc and 2.34pc respectively.

In November 2020 someone buying a property with a 10pc deposit and a 25-year mortgage would have needed to earn £5,500 more per year to afford a house, according to Hamptons estate agents. By November 2021 this had risen to £8,900, and last month this difference hit a record £13,000.

The income needed to buy the average house is now £ 65,447, up from £52,525 two years ago. For a flat, the income required is £52,422, compared with £46,990 during the same period, Hamptons data showed.

Ms Beveridge said: “Affordability constraints may mean that more buyers settle for slightly smaller homes than they would have liked. This is likely to be particularly true in the most unaffordable markets, such as London and the South East.”