21 May 2024
UK data review (Jan/Feb 2024)
While activity stagnated in April, the slowdown was unequal with a north-south divide reappearing. The RICS survey reported the largest loss of momentum in new buyer enquiries across the South, while demand rose in the North and Wales. In fact, demand is higher across the North and Wales versustheir 2010s average (see chart 1).
As a result, house price growth is stronger, with price rises in the North East (+3%) and North West (+1.4%) a likely reflection of relative affordability. Prices in more expensive areas such as London and the South East fellby 4.8% and 2.1%, respectively.
Stretched affordability is perhaps the most dominant driver of near-term housing market activity. High house prices relative to incomes are not a new phenomenon;based on a general 5x earnings lending threshold, house prices have been ‘unaffordable’ since the early 2000s. But now, higher interest rates are adding to the difficulty.
Throughout the 2010s, low interest rates enabled many to increase their loan-to-income(LTI)ratio, particularly in high priced areas such as London and the South. However, more recently, LTI and loan-to-value multiples have fallen at a faster rate than house prices, yet monthly mortgage repayments have risen sharply, pointing to the impact of higher interest rates.
Notably, interest payments on new lending as a proportion of total mortgage costs has almost doubled in two years across all regions, also in part due to a lengthening of mortgage terms to help withstand higher interest rates. However, inreal GBP terms, the greatest impact is being feltacross the South where affordability is most stretcheddespite incomes falling in real terms across all regions. As such, while interest rates remain elevated, it ispossiblethat the recovery in the housing market could see this North-South divide widen further.
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1. This report is dated as at 17 May 2024.
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