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UK mortgage costs remain high prompting rise in demand for flats

mortgages The tall high-rise residential development  called Higgs Yard, rises with more storeys above existing local housing bordering Ruskin Park in Lambeth, south London, on 23rd January 2023, in London, England. Higgs Yard will be a residential-led mixed-use development on the Higgs Industrial Estate in Loughborough Junction, London SE24. 134 new homes and 4,150m2 of commercial floorspace. 50% of the homes will be affordable.
Value-conscious early buyers have shifted their buying preferences towards flats to avoid big mortgages. Photo: PA/Alamy (RichardBaker)

Prospective home-buyers are putting off jumping on the housing ladder as mortgage costs remain high, with the few that take the jump shifting to more affordable flats.

The property market is off to a slow start as buyers wait to see if house prices and mortgage rates start to fall more quickly, according to property site Zoopla.

With rates generally sitting below 5% and looking set to remain in the 4-5% range in 2023, future homebuyers are waiting steady as this is a better prospect than the 6% to 6.5% levels at the end of last year.

Value-conscious early buyers have shifted their buying preferences towards flats – with over a quarter of new buyers (27%) now looking for 1 and 2-bed flats (up 5% in comparison to a year ago).

Read more: Rents for homes outside London hit record high

In contrast, the share of demand for 3-bed houses has fallen 5 percentage points to 39%, although they are still the most in-demand homes across the UK, data from Zoopla showed.

Watch: How much money do I need to buy a house?

“This is a trend we are seeing across all areas of the UK in the first few weeks of the year as early buyers seek better value for money. In London, 1- and 2-bed flats account for 49% of demand, up from 42% a year ago.”

The difference in price between flats and houses is stark: outside London, the average 2-bed flat listed for sale on Zoopla at £196,000, is almost £100,000 cheaper than an average 3-bed home (£293,000). 1-bed flats are £150,000 cheaper.

Richard Donnell, executive director at Zoopla, said: “The first few weeks of the year have got off to a stronger start than might have been expected given how market activity stalled at the end of 2022. There has been a clear shift towards flats as the early buyers focus on value for money and adjust expectations given the hit to buying power from higher mortgage rates.

“A proportion of existing homeowners are holding back waiting to see if sizeable price falls materialise and how far mortgage rates fall back before entering the market. We believe demand for homes has room to improve further in the coming weeks. Anyone serious about selling needs to be realistic on the asking price and needs to ensure this is in line with what buyers are prepared to pay.“

Read more: Where are the UK's cheapest rental homes?

The difference in price between flats and houses is stark in many areas, supporting this shift in demand. Outside London, the average 2-bed flat listed for sale on Zoopla at £196,000, is almost £100,000 cheaper than an average 3-bed home (£293,000). 1-bed flats are £150,000 cheaper.

Demand for flats is on the rise. Chart: Zoopla
Demand for flats is on the rise. Chart: Zoopla

Tom Ashwood, director of London agency Tom Ashwood Real Estate, added: “Due to the interest rate rises we have seen since September, it is apparent that a large portion of our buyers are not prepared to risk overspending and therefore have reduced budgets accordingly. This, in my opinion, isn’t isolated to the housing market but the wider cost of living crisis that has been heavily publicised. I will say that the appetite to buy is most certainly still there.

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