The housing market continues to feel the effects of rising mortgage rates and cost of living pressures. This has resulted in weaker demand from homebuyers, fewer sales, and very low home price gains.

The August 2023 Home Price Index shows housing market activity well below pandemic-era levels, but unchanged from 2019.

Homebuyer demand over the last 4 weeks is 34% lower than the average for the same period over the last 5 years (2018-2022).

The number of agreed property sales has fallen by 20 per cent. This number is somewhat supported by the fact that there are now more homes for sale after the low supply of the last two years.

House price inflation slowed rapidly last year due to weaker demand, more price-sensitive buyers and fewer sales.

At 0.1 per cent per annum, UK house price growth is almost at a standstill. This is the lowest annual rate of growth since August 2012, and the lowest in 11 years.

There is a clear north-south divide in house price inflation. Every region in the South of England saw house prices fall by as much as -1 per cent last year.

But all other regions and countries in the UK saw house price increases in the low single digits. Scotland had the highest house price growth at +1.7 per cent.

This pattern reflects the greater impact of higher mortgage rates on the high-value housing market. Homebuyers in the South of England require larger mortgages and deposits as well as higher incomes.

This has squeezed more homebuyers out of the southern market, which has weakened demand and pushed down house prices.

First time buyers can afford to buy a home at higher mortgage rates, which goes some way to explaining the variation in house price growth across the UK.

First-time buyers account for a third of annual sales, most of whom have previously rented their homes. The difference in affordability between renting and buying therefore influences how many renters buy.

In recent years, low mortgage rates have meant that on a monthly basis it is much cheaper to buy than to rent. The market is full of first-time buyers, many of whom can afford larger homes of 3 bedrooms or more.

With mortgage rates now at 5 per cent and higher, renting in the UK is on average 10 per cent cheaper than buying, despite the fact that rents have increased more rapidly in recent years. This has reduced the number of first time buyers in the market and therefore limited house price growth.

The experience of first time buyers varies across the UK.

In the six regions and countries with the lowest house prices in the UK, it costs less for renters to buy the home they rent than to rent it.

In Scotland and the North East, average mortgage repayments are 18 per cent lower than rents. This supports access to the housing market and demand for housing.

In contrast, in all areas of the South and Centre of England, it is more expensive to buy than to rent. In London, average mortgage repayments are 24 per cent higher than monthly rents.

This is the main reason why the South of England has seen the biggest fall in house prices.

The reality for first-time buyers across the UK is even worse. Mortgage lenders are requiring new borrowers to be able to afford mortgage stress rates closer to 8.5 per cent than the 5.6 per cent product rate used in our analysis.

Whilst house price growth has slowed rapidly over the last year, the main impact of rising mortgage rates has been a reduction in the number of sales.

Our home price index tracks the number of homes "under contract to sell." This is down 21 per cent compared to last year, although we are still on track to achieve one million sales in 2023.

This would be the lowest number of property sales since 2012 and would equate to every household moving every 23 years.

We usually consider eight years to be the average time it takes for people to move house in the UK. This increase highlights the profound impact of recent economic changes on the housing market.

Our House Price Index shows a 21% net fall in property sales this year compared to 2022.

This decline comes mainly from mortgage buyers: we expect the number of mortgage sales to fall by 28 per cent compared to last year. Cash sales, on the other hand, will be down just 1 per cent compared to 2022.

Homeowners with mortgages typically account for a third of property sales each year. This segment is under less pressure to relocate because they already own a home. Where possible, many of them will wait for mortgage rates to rise before moving.

Landlords are also being squeezed by rising mortgage rates. In the UK, mortgage purchases account for around 8 per cent of property sales.

However, buy-to-let investors in the south of England now need to own 40-50 per cent of a property's value to reach this figure. As a result, there will be less new investment this year.

When it comes to first-time buyers, we expect the number of buy-to-let buyers to decrease in 2023, but remain at that figure to some extent. Flexible working provides them with the option of buying a home in cheaper markets where it is cheaper to buy than to rent.

In addition, the supply of homes to attract first-time buyers will increase as more landlords sell their previously rented homes. These homes are typically priced 25 per cent lower than the wider housing market.

Affordability remains the main barrier to increased sales in the UK housing market. By 'affordability' we mean both house prices and mortgage repayment costs.

Affordability is lowest in the South of England - in many areas you need a household income of over £75,000 to buy a home. UK mortgage rates are 23 per cent higher than last year, and average monthly mortgage repayments have increased by £216.

However, despite the rise in mortgage rates, average wages increased by 7 per cent last year, improving housing affordability.

With house prices falling slightly, the gap between house prices and incomes is narrowing. In this sense, affordability will be 9-10 per cent higher in 2023.

As a result, the UK house price to income ratio will be 6.3 times higher by the end of this year. This puts the affordability of buying a home on a par with the average of the last 20 years.

Our House Price Index shows that London has seen the biggest improvement in affordability of any UK region.

London's house price-to-income ratio is set to fall to single digits for the first time in 11 years, as house price growth in London has been below average since 2016.

We expect wages to continue to grow faster than house prices in 2024. This will further increase affordability, particularly in the South of England.

Combined with the fall in mortgage rates to a range of 4-5 per cent, this will boost sales volumes to their long-term average.

Looking ahead, we expect property sales volumes to recover well over the next 2-3 years.

More flexible working, demographic trends due to an ageing population, a strong labour market and high levels of immigration will encourage people to move.

Mortgage rates are starting to move lower, and we expect them to fall below 5 per cent later this year. But this will be a long process, relying on financial markets to assess how high interest rates need to be to keep inflation in check.

Any fall in mortgage rates is unlikely to have an impact on the market or further improve affordability until at least the first half of 2024.

This is why we are less optimistic about house price growth, which is set to remain in the +2% to -2% range for the foreseeable future.