UK house prices climb over £5,000 driven by demand for smaller homes

UK house prices experienced a growth of 1.9% in February, indicating a £5,318 increase over the past year. This means properties are now only £7,801 shy of the peak observed in August 2022.

Demand among buyers for smaller homes helped to drive growth in UK property prices in the early months of this year, according to Halifax.

Flats and terraced houses made up for 57% of all homes purchased by first-time buyers last year. However, this varies 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 prices rose most quickly at the start of the year than any type of property.

Annual growth reached 2.7% in February, or £4,290 up over the last year. The average price paid of £163,016 is just £5,551 below the peak price recorded for flats in August 2022.

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“This could signal that the race for space is over, reflecting the toll high living costs and high interest rates have taken on buyers’ affordability levels. With interest rates holding at 5.25% since August last year and inflation, although easing now, remaining high throughout 2023, people found their mortgage affordability levels severely constrained," Alice Haine, personal finance analyst at Bestinvest, said.

At a regional level, Scotland saw the strongest growth in prices for flats over the last year, rising by 5.9% or £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.

“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," Amanda Bryden, head of Halifax Mortgages, said.

“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,” she added.

While the overall number of first-time buyers is lower than recent years, they made up 53% of all homes bought with a mortgage in 2023. That’s the highest proportion since 1995.

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.

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The North East has seen prices for terraced houses rise the most on an annual basis, up by 7.6% (£8,938).

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%).

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% (£17,300).

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