"As interest rates have stabilised and buyers adjust to the new economic reality of owning a home, one way to compensate for higher borrowing costs is to target smaller properties"
- Amanda Bryden - Halifax
Newly released data from Halifax has revealed that smaller homes have seen the strongest increases in price growth during the first few months of this year.
On a national level, annual property price growth reached 1.9% in February this year, having plunged as low as -4.1% in October 2023. In cash terms, prices are up by £5,318 over the last year and are only £7,801 below the peak recorded in August 2022.
Despite the challenging economic environment, such is the growth seen in property prices over recent years that they remain 19.9% (£47,573) above pre-pandemic levels. By comparison, in the four years prior to March 2020, they rose by just 13.4% (£28,027).
Halifax's data shows that as rates stabilise and activity starts to pick up, it’s smaller homes that have recorded the strongest increases in price growth in the early part of this year, as buyers adjust their expectations to compensate for higher borrowing costs, as well as coping with the general cost of living squeeze.
Key to this has been a resilient first-time buyer market. While the overall number of first-time buyers is lower than in recent years, they made up 53% of all homes bought with a mortgage in 2023 - the highest proportion since 1995.
Flats and terraced houses made up 57% of all homes purchased by first-time buyers last year. However, this varies hugely by region. For example in London, which has the highest average property price in the UK by some margin, flats and terraced homes account for 90% of all first-time buyer purchases.
Flats
The switch in demand among buyers – reversing the ‘race for space’ which was such a dominant feature of the pandemic-era housing market – has seen prices rise most quickly for flats at the start of this year.
Annual growth reached 2.7% in February, or £4,290 up over the last year, having sunk to -5.9% last autumn. The average price paid of £163,016 is just £5,551 below the peak price recorded for flats in August 2022.
At a regional level, Scotland saw the strongest growth in prices for flats over the last year, rising by 5.9% (£6,489) to sit at £116,477.
Only one UK region saw a decrease in flat prices over the last year, falling by -2.9% in Yorkshire and Humberside.
Looking further back, at a national level flats remain 11.9% (£17,349) above pre-pandemic levels, with East Midlands posting the biggest gains (18.7%, £20,923) of any region.
Terraced houses
The trend for smaller homes is also seen in houses, with the average price paid for terraced properties growing by 2.6% (£5,643) over the last year, now standing at £224,173.
The North East has seen prices for terraced houses rise the most on an annual basis, up by 7.6% (£8,938).
Looking at the longer-term trend, the average price for terraced homes is up by 20.5% (£38,090) over the last four years.
Semi-detached houses
With demand for larger properties easing, semi-detached houses have seen the weakest annual growth over the last year, rising by 1.7% (£4,797), with the average price paid now £295,199.
Once again the North East saw the biggest increase in average price, up by 5.9% (£10,381) annually.
However three regions saw average prices for semi-detached properties fall: Eastern England (-1.3%), Greater London (-1.2%), and the South East (-0.8%).
Since March 2020 average prices for semi-detached homes are still up by 21.4% (£51,950).
Detached houses
At the top end of the size scale annual growth for detached houses hit 2.0% (£8,853) in February, with an average price of £451,655.
Yorkshire and Humberside recorded the biggest increase in detached house prices of the last year, up by 5.0% (£17,300).
Detached homes still maintain the biggest increase in average house price of any property type over the last four years, up by 23.9% (£87,034).
Amanda Bryden, head of Halifax Mortgages, said: “It’s important not to gloss over the challenges facing the UK housing market, given the impact of higher interest rates on mortgage affordability, coupled with a continued lack of supply of new homes. But scratch beneath the surface and there is a more nuanced story, one which shows that demand for different property types in different parts of the country can vary hugely.
“As interest rates have stabilised and buyers adjust to the new economic reality of owning a home, one way to compensate for higher borrowing costs is to target smaller properties. This is especially true among first-time buyers, who have proven to be resilient over recent years, and now account for the largest proportion of homes purchased with a mortgage in almost 30 years.”
“We see this reflected in property prices for the first few months of this year, with the value of flats rising most sharply, closing the ‘growth gap’ on bigger properties that’s existed for most of the last four years.”
Nathan Emerson, CEO of Propertymark, said: “Whilst it is a positive sign for those hoping to sell their homes that property prices are rising, the market is still overwhelmingly expensive, especially for first-time buyers who are adapting their property choices based on current prices.
"Propertymark’s own Housing Insight Report has demonstrated an 18 per cent increase in new properties coming to the market, but with a year-on-year increase in population, this will still not be enough. By focusing on the housebuilding targets the UK Government could provide more choice and meet surging demand.”
Tom Bill, head of UK residential research at Knight Frank commented: “Not only do higher mortgage rates mean tighter budgets, demand for housing also becomes skewed towards needs-driven buyers.
"As a result, first-time buyers, growing families and people moving for work have driven demand in lower price brackets over the last year. Those in bigger properties or sitting on more housing equity tend to be more discretionary and some will be waiting for the appearance of more mortgages starting with a three.”
