Why are house prices so high?

Over the last few years, UK house prices have experienced record highs; we’ve seen growth levels consistently hit double figures year on year.

According to data from the Office for National Statistics (ONS), the average house price was £283,000 in May 2022, a whopping £32,000 (12.8%) higher than the average house price at the same time last year. In England, house prices increased to £302,000, representing a 13.1% increase over the year.

This is excellent news for existing property owners. But, for first-time buyers looking to get onto the property ladder, this presents even more of an obstacle. Each year that goes by, you have to save more and more money for your deposit. But why are house prices so high? 

That’s what we’ll discuss in this article. We’ll look at the main factors that have caused this housing boom, which regions have experienced the most growth, and whether the housing market will crash later this year. 

Why are house prices so high?

House prices have been influenced by supply and demand issues, low interest rates, stamp duty holidays, increasing rent prices, the race for space, and the mortgage guarantee scheme. These factors have created a perfect storm over the last few years, which has caused property prices to soar, an effect that we’re still feeling right now.

However, it’s believed that this extraordinary growth will dampen as the year goes on due to rising interest rates, inflation and the cost of living. Let’s take a look at all these factors in more detail. 

1. High demand and low supply

One of the basic rules of economics is that prices will rise when demand is high, and supply can’t keep up. This is precisely what has happened to the UK property market; there simply isn’t sufficient housing supply to meet buyer demand, causing high house prices.

Currently, new houses aren’t being built fast enough. Property development levels are low, and in 2021/21, they fell to their lowest level in five years. This was heavily influenced by the national lockdowns that the UK experienced. However, the amount of new properties built over the years is dwarfed by the increasing number of people looking for a house. 

This is compounded by the fact that the UK has a relatively strong culture of home ownership. This is due to both cultural and economic factors, with parents often assisting their kids with the house deposit or putting the mortgage in their name. Whilst this helps first-time buyers get onto the property ladder, it increases the number of people looking for a property – a demand that is already hard to meet. 

2. Low interest rates

The base interest rate, which the Bank of England sets, has been extremely low for over a decade. Since being set at 0.5% on 5 March 2009, interest rates remained below 1% all the way up to 5 May 2022. 

Many mortgage lenders set their own interest rates based on the base rate set by the Bank of England. When interest rates are low, mortgages become more affordable. This is because the monthly mortgage payments are considerably lower, which makes taking out a mortgage a financially viable option for many home-buyers. 

It also incentivises people to invest in the housing market. When the average price of a property increases more than the interest rate you are being charged on it, properties become a sound investment choice. On top of that, a homeowner can rent the property out to a tenant and gain additional income on it, essentially using the rental income to pay for the mortgage, all whilst house prices rise. This investment opportunity increases the demand for homes, which further drives up property prices. 

Moreover, during inflation – as we’re going through now – money sitting in the bank loses its value daily. As such, allocating those funds to an appreciating asset, such as a house, will mean that their money will hold value far better than if it was kept as cash.  

3. Stamp duty holiday

One of the most impactful reasons for rapid house price growth over the last two years was the Stamp Duty Land Tax (SDLT) Holiday. Stamp Duty is a property and land transaction tax where you have to pay a certain amount depending on the property’s value. Currently, the threshold is £125,000, meaning any property purchases that cost above this threshold will be subject to the SDLT tax. 

The SDLT holiday meant that buyers were exempt from paying stamp duty on purchases up to £500,000 if they were completed before 1 July 2021. This could mean a saving of up to £25,000. The stamp duty holiday was then extended to 30 September 2021 for properties up to £250,000. As a result of the massive savings on offer, this caused a buying frenzy where people rushed to find deals and get them finalised before the deadlines. 

As to be expected, this resulted in a surge in demand. Using HMRC data, we can see that leading up to these deadlines, there was a massive surge in property transactions. The unprecedented demand that the stamp duty holiday caused during 2021 was a significant factor in house prices rising. 

4. Renting a house is getting increasingly expensive

If you don’t want to take out a mortgage, your only other option is to rent a house. In years gone by, it was customary for people to rent a home whilst they save money to buy a house. But, with the cost of living and inflation rising, landlords have begun to increase the amount they charge for rent. As such, the gap between monthly mortgage repayments and monthly rental payments has narrowed.

According to Statista, the average rent for a UK home is £1,113 per month, up 10.5% from the same period last year and up 0.9% from last month. London has experienced the highest annual growth with 14.9%, with the average rental price of a home being £1,846 per month. If you exclude London from the average UK figures, the average rent price is £936 per month, up 8.7% from the previous year.

ONS data has shown that this is the highest annual growth rate for rental prices for over five years. With rising prices for rent, mortgage rates are still relatively cheap, with some mortgage payments often being lower than the cost of rent. It would make economic sense to take out the mortgage where you at least have the benefits of becoming a homeowner and building equity. 

Therefore, now that the cost of renting and a mortgage have almost converged, more people are looking to buy a house than ever before. This increasing number of people searching for a property to buy instead of renting has impacted UK house prices. 

5. Shift from the big cities to the countryside

The UK went through three national lockdowns starting in 2020, where UK residents were forced to spend the majority of their time locked inside their flats or house building. This sudden and drastic change was not easy, particularly for those living in cramped apartments or flats with minimal space. 

Whilst confined to their homes, there was a general movement across the country where people began to rethink what they thought of as their ideal home. Instead of being located in the city with the convenience and easy access to almost anything they required, it shifted towards more space. This meant space both inside their homes and outside, with gardens and open spaces such as nearby green land. This was known as the ‘race for space’. 

This shift in mentality was combined with the introduction of remote working. Due to the lockdowns, it was possible to work from home. It’s a trend that has carried well into 2022, and we’re beginning to see many job openings being advertised as either hybrid or remote working conditions. This means that employees don’t need to be in a city; they can work from anywhere with an internet connection. 

With house prices rising every year, especially in expensive places to buy property such as London, more and more people are opting to move into the countryside. The same amount of money that might buy them a 3-bedroom terraced house or small apartment in the capital can buy them a 4-bedroom detached property in the countryside with acres of land. As such, more and more people are dispersing away from cities. 

This is proven by the annual house price growth of the South East and South West being amongst the highest in the country. These areas are far enough from London that you can reap the benefits of having more space but also close enough that you can commute to the big city should you be needed for work or to see family and friends. 

6. Mortgage guarantee scheme

In April 2021, then-chancellor Rishi Sunak introduced a new mortgage scheme called the ‘Mortgage guarantee scheme’. It was launched to help both first-time buyers and existing homeowners buy a home with a low deposit. 

It works by offering mortgage lenders the option to buy a guarantee on a portion of the mortgage and provides compensation of up to 80% of the property’s value in the event of losses due to repossession.

Due to the government’s protection of mortgage lenders, the scheme will allow potential homeowners to take out a mortgage with as low as a 5% deposit. The scheme would apply to houses with a value of up to £600,000 and is part of an initiative from the government to turn “Generation Rent into Generation Buy”. The mortgage guarantee scheme is valid for new mortgages until 31 December 2022, meaning buyers can still take advantage of it. 

With a deposit of £13,500, you would be able to buy a property worth £270,000. With such a good deal available on offer, buyers flocked to the property market to take advantage, raising demand and thus house price inflation. 

Where are house prices rising the most?

ONS data shows that Wales had the highest over-the-year house price growth with 14.4%. In second place was England with 13.1%, followed by Scotland with 11.2%, and finally Northern Ireland with 10.4%.

Regarding regions within England, the South West had the highest growth with 16.9%. Following closely behind are East Midlands and the East with 15.2% and 14.8%, respectively. London saw the lowest year-on-year growth out of all regions with 8.2%. The full table and numbers can be found below:

Country/Region12-Month Annual Growth (May)
Northern Ireland10.4%
South West16.9%
East Midlands15.2%
West Midlands14%
South East13.5%
Yorkshire and the Humber12.6%
North West11.5%
North East9.7%

Will house prices crash in 2022?

If the last two years have proven anything, it’s that it’s hard to predict what will happen to the housing market in the future. However, we have seen a bullish run over the last few years which will be difficult to sustain for an extended period. That’s why experts generally agree that whilst house prices may not crash, growth with certainly cool down. This is due to a few reasons:

  • Inflation and cost of living – The cost of goods, services, bills, and fuel are rising at unprecedented rates, stretching the budgets of many UK residents. With less money left over each month, fewer people have enough money saved up to put down a house deposit. It could also mean that people are unable to keep on top of mortgage payments, forcing them to sell, thus increasing supply. 
  • Rising interest rates – Interest rates have risen four times since February of this year – from 0.5% to 1.25% – and it is believed that the government will raise interest rates at least once more before the end of the year. This will make mortgages increasingly expensive, which could reduce demand as people are unable to afford them.
  • Market correction – House prices have exploded over the last few years, and experts expect a market correction in the near future.

Final Thoughts

House prices have risen due to a combination of factors such as low interest rates, high demand and low supply, and government incentives to increase home buying.
Growth has been highest in the Midlands and surrounding areas of London, with the London area having the lowest over-the-year change out of all regions. It is widely estimated that the significant increases in house prices we’ve seen over the last few years should cool off over the next year as interest rates rise to combat increasing inflation.