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UK property: Home buyers with mortgages face 28% hit to buying power in 2023

UK property: A row of terraced houses in Leicester
According to Zoopla’s house price index, the recent spike in mortgage rates for new borrowers is now the most important factor for the property market this autumn. Photo: Darren Staples/Reuters

UK property buyers with mortgages face a 28% hit to their purchasing power next year, new data has shown.

According to Zoopla’s house price index, the recent spike in mortgage rates for new borrowers is now the most important factor for the housing market this autumn.

Higher mortgage rates are reducing buying power by as much as 28% if mortgage rates reach 5% by the end of the year, it said. This is assuming buyers want to keep their monthly repayments unchanged.

In addition to this, asking price reductions are set to return to pre-pandemic levels.

However, despite the increasing cost of living pressures, UK house growth remains stable at 8.2% growth year-on-year, with some regions including Wales, the north east, and Scotland seeing 10 years of growth compressed into just two over the pandemic.

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“To offset the hit to buying power, we believe that buyers have three options,” Zoopla said. “They can put down a larger deposit, allocate more of their income to mortgage costs, or adjust their budgets and consider buying a smaller property or purchasing in a cheaper area.”

The real estate firm expects that higher mortgage rates will have the greatest impact on buying power in high-value markets in London and the South East, as well as regions such as Wales that have registered the greatest surge in house prices over the pandemic.

Meanwhile, London has lagged the rest of the market in terms of annual growth rates, with the average value of a flat in the capital increasing just 2.4% as buyers prioritise space and more working from home.

The average house value in London has risen by over £100,000 since the start of the outbreak of COVID-19.

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“Measures of housing market activity have been very resilient over the summer. A surge in home values over the pandemic and the rise of mortgage rates means we face a sizable hit to household buying power over the rest of 2022 and into 2023,” Richard Donnell, executive director at Zoopla, said.

“While the recent changes to stamp duty are welcome, supporting activity in regional markets and the first time buyer market in southern England, the increase in mortgage rates will erode much of the gains. Homeowners that want to sell their home this year need to price realistically and seek the advice of an agent on local market trends.”

It comes after chancellor Kwasi Kwarteng cut the amount of stamp duty tax payable on all property transactions on Friday.

Buyers no longer pay stamp duty tax on the first £250,000 of a property purchase, while the price at which first-time buyers will pay stamp duty has increased to £425,000 from £300,000.

Before the announcement, stamp duty relief was not available for any first-time buyer home priced over £500,000. This threshold has now been raised to £625,000.

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Sarah Coles, senior personal finance analyst at Hargreaves Lansdown: “When the dust settles on the chaos in the mortgage market, the ground will have shifted, and fixed rates will have risen significantly.

“The impact on buying power will mean some incredibly difficult decisions for homebuyers, who could end up with smaller ambitions or horribly tight budgets. This is going to take a toll on the market.

"With all the factors conspiring against buyers at the moment, it’s difficult to see how house prices won't soften from here. We are already seeing the first analysts forecasting price falls, and the risks of a correction have increased.”

Watch: Will UK house prices ever fall?