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Is the race for space over as buyers look to smaller properties?

Is the race for space over as buyers look to smaller properties?
Christina Hoghton
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Christina Hoghton

Demand for smaller homes has driven up property prices in 2024.

That’s according to new research by Halifax.

It said that annual property price growth reached 1.9% in February this year, having fallen as low as -4.1% in October 2023. In cash terms, prices are up by £5,318 over the last year and by £47,573 since before the pandemic.

However, the national picture masks both regional differences and large variations according to property type.

Size isn’t everything

Smaller homes have recorded the strongest increases in price growth in the early part of this year, said Halifax. It reckons this is due to buyers adjusting their expectations to “compensate for higher borrowing costs, as well as coping with the general cost-of-living squeeze”.

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, the highest proportion since 1995.

And, of course, first-time buyers are more likely to buy smaller properties. Flats and terraced houses made up 57% of all homes purchased by first-time buyers last year.

Flat prices rise strongly

This reversal of the pandemic’s ‘race for space’ has seen prices rise most quickly for flats at the start of this year, by 2.7% annually in February. The average price paid of £163,016 is just £5,551 below the peak price recorded for flats in August 2022.

At a national level, flats remain +11.9% (£17,349) above pre-pandemic levels.

The average price paid for terraced properties is up by +2.6% (£5,643) over the last year, now standing at £224,173.

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.

Annual growth for detached houses hit +2.0% (£8,853) in February, with an average price of £451,655.

Amanda Bryden, head of Halifax Mortgages, said: “It’s important not to gloss over the challenges facing the UK housing market, given the impact of higher interest rates on mortgage affordability, coupled with a continued lack of supply of new homes. But scratch beneath the surface and there is a more nuanced story, one [that] shows that demand for different property types in different parts of the country can vary hugely.

“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.”

Alice Haine, personal finance analyst at Evelyn Partners, added: “While the pandemic property surge was largely driven by demand for larger homes with gardens, as buyers exited cities in the hunt for more space at the height of the work-from-home [WFH] era, that trend has now swung in the opposite direction.

“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.”

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