• Support
    • Economic Reports
    • Market Research

UK in focus: A different North-South housing divide

  • 3 Mins
  • Article

UK GDP rose at its fastest rate for 2-years in Q1, while wage growth showed further resilience. Meanwhile, the Bank of England opened the door to interest rate cuts a little wider.

While activity stagnated in April, the slowdown was unequal with a north-south divide reappearing. The RICS survey reported the largest loss of momentum in new buyer enquiries across the South, while demand rose in the North and Wales. In fact, demand is higher across the North and Wales versus their 2010s average (see chart 1).

As a result, house price growth is stronger, with price rises in the North East (+3%) and North West (+1.4%) a likely reflection of relative affordability. Prices in more expensive areas such as London and the South East fell by 4.8% and 2.1%, respectively.

Stretched affordability is perhaps the most dominant driver of near-term housing market activity. High house prices relative to incomes are not a new phenomenon; based on a general 5x earnings lending threshold, house prices have been ‘unaffordable’ since the early 2000s. But now, higher interest rates are adding to the difficulty.

Graph showing differences in housing demand across the UK

Throughout the 2010s, low interest rates enabled many to increase their loan-to-income (LTI) ratio, particularly in high priced areas such as London and the South. However, more recently, LTI and loan-to-value multiples have fallen at a faster rate than house prices, yet monthly mortgage repayments have risen sharply, pointing to the impact of higher interest rates.

Notably, interest payments on new lending as a proportion of total mortgage costs has almost doubled in two years across all regions, also in part due to a lengthening of mortgage terms to help withstand higher interest rates. However, in real GBP terms, the greatest impact is being felt across the South where affordability is most stretched despite incomes falling in real terms across all regions. As such, while interest rates remain elevated, it is possible that the recovery in the housing market could see this North-South divide widen further.

Contact us

How can we help you today?