New Year, New Hope? Affordability Crisis Looms

• First-time buyers in 2024 continued to face affordability challenges. The legacy of higher interest rates and the ongoing struggle to save for a deposit meant that getting on the property ladder remained a difficult task for many.
• Homeownership is slipping out of reach, so act now if you can afford to buy before prices rise further and borrowing becomes even harder.
• As we predicted in our November report, the base rate held at 4.75%. It isn't expected to come down again until February 2025.
• Inflation increased again last month to 2.6% from 2.3%, the highest percentage for 8 months.
• While average house prices have skyrocketed and hit their highest-ever levels in 2024, transaction volumes have massively decreased.
• The remortgage market is and will be, hit the most from all of this as prospective remortgagers need lower rates to go ahead.
• Mortgage lenders have been slow to lower their rates since the November base rate fall; expect better deals to come into the market from early 2025.
• The current average 5-year fixed rate mortgage is 5.06% and the current average 2-year fixed rate mortgage is 4.81%.
• The lowest available 2-year fixed rate is 4.21% and the lowest available 5-year fixed rate mortgage is 4.07%.

Government to address England's housing crisis

The government has reiterated its commitment to tackling England's housing crisis with a renewed focus on increasing housing supply.

Prime Minister and Labour leader Keir Starmer has emphasised the urgency of addressing the housing crisis, stating that the government "owes it to working families to take urgent action."

This intervention comes as affordability remains a critical concern, with average house prices in many areas significantly outpacing wage growth, creating a barrier to homeownership for many. The housing shortage has far-reaching social implications, contributing to overcrowding, housing insecurity, and impacting social mobility.

Ministers have confirmed binding targets requiring local authorities to help construct 370,000 homes annually. This will likely involve specific targets allocated to each local council.

This push aims to deliver 1.5 million new homes throughout this parliament, a significant undertaking designed to address long-standing supply issues.

Housing Secretary Angela Rayner stated "I will not hesitate to do what it takes to build 1.5m new homes over five years and deliver the biggest boost in social and affordable housebuilding in a generation.".

The revised National Planning Policy Framework is intended to streamline the planning process and encourage development on suitable sites, while also aiming to define the 'grey belt' for the first time, potentially opening up new areas for housing.

This commitment reinforces the government's intentions they set out in their pre-election manifesto, with an emphasis on social and affordable housing. While increasing supply is crucial, we must ensure that these new homes are affordable for those who need them most.

The government's focus on the 'grey belt' – land that is neither designated Green Belt nor previously developed – is likely to be a key area of contention. Balancing the need for new homes with environmental concerns and local opposition will be a significant challenge.

Sources: Reuters and Financial Times.

The cost of an average UK home is officially now 'unaffordable' according to ONS

The housing affordability crisis has reached a critical point, with ONS (Office for National Statistics) revealing that only 10% of English households can afford an average-priced home, requiring 8.6 years of average disposable income.

In London, soaring house prices over the past two decades have created an exceptionally challenging market. Even households in the top 10% of local earners may struggle to afford an average-priced property in the capital. This illustrates the extreme pressures faced by those seeking to buy in London and the urgent need for policies that address the capital’s unique housing challenges.

As Labour MP Chris Curtis, co-chairman of the Labour Growth Group and a member of the Housing Select Committee, notes, "These figures demonstrate the staggering scale of our country’s housing crisis and underline the urgency of the task facing this Government to end it." Curtis also emphasises the need for economic growth and radical planning reform to address this challenge.

Affordability issues are also having a knock-on effect on the rental sector. Research from Zoopla reveals that annual rents for newly let properties are now £3,240 higher than in 2021, representing a 27% increase compared to a 19% rise in earnings.

This disparity has pushed the average annual cost of renting to £15,240, up from £12,000 in 2021, further worsening housing cost pressures for many.

While rent increases are now slowing, this is largely due to tenants reaching the limits of affordability, rather than a significant improvement in supply.

Sources: ONS, The Guardian, The Independent.

Bank of England to cast a watchful eye over investors

While the housing market has experienced a period of relative stability in 2024, the Bank of England is maintaining a vigilant watch over investor activity, concerned that this calm period could mask underlying risks.

Deputy Governor Dave Ramsden, who oversees markets and the Bank's balance sheet, cautioned, "...whilst this has been a year of relative stability, that is never a sign that we should get complacent... the comparatively calmer market conditions of this year could lead to greater risk-taking in future."

This suggests the Bank will be actively monitoring for signs of excessive risk-taking that could destabilise the market. Groups such as buy-to-let landlords with large portfolios, institutional investors in pension funds, and overseas investors can significantly influence market dynamics.

The Bank is concerned about risks such as excessive borrowing ('leverage'), which can amplify market swings, and 'herding behaviour,' where investors act similarly, potentially creating bubbles or crashes.

These activities are detrimental to first-time buyers; it makes it even harder for them to compete in the market. To mitigate these risks, the Bank collects mortgage lending and property transaction data to conduct stress tests on lenders to assess their resilience.

Source: Reuters