UK first-time buyers opt for smaller homes as higher mortgage rates bite

First-time buyers in the UK are selecting smaller properties in the face of rising mortgage costs, in a sign that many prospective purchasers are compromising on the size of their first home rather than staying in the tight rental market.

Most first-home buyers chose a one- or two-bedroom property in the first quarter of 2023 for the first time since 2010, according to analysis by estate agent Hamptons of transaction records from Countrywide, a housebuilder, as a sharp rise in borrowing costs reshapes the market after more than a decade of low interest rates.

The jump last year in mortgage rates, which shot as high as 6 per cent after then-chancellor Kwasi Kwarteng’s “mini” Budget, had sparked fears that potential first-time buyers would be pushed out of the housing market by borrowing costs. But the data suggests that buyers are opting for smaller first homes instead.

“Most first-time buyers, once they have saved up their deposit, want to get on with their purchase,” said Aneisha Beveridge, head of research at Hamptons. “Those who can afford to do so are carrying on buying, and compromising on size.” 

The pace of home sales has slowed across all categories of buyers, after a boom in transactions in 2021 and 2022 that was driven by cheap mortgage rates and government incentives during the Covid-19 pandemic.

The number of sales agreed was down 16 per cent in March compared with the same month a year earlier, according to property website Zoopla, although still 11 per cent higher than March 2019.

House price measures gave contrasting signals in March. Data from mortgage provider Halifax showed prices 1.6 per cent higher year on year, while figures from Nationwide showed a 3 per cent annual drop, the largest since 2009.

Values so far have declined less than the most pessimistic forecasts, with some analysts warning of a peak-to-trough fall of 10 per cent of more this year.

Hamptons found purchases by first-time buyers dropped less than other kinds of buyers, such as investors and people relocating, meaning the share of houses bought by first-time buyers hit a record high of 27 per cent.

Beveridge said first-time buyers were increasingly opting for flats over houses, which registered ferocious demand and price rises at the height of the pandemic as people sought more space.

Mortgage rates have steadied since the “mini” Budget at roughly double the cost a year ago. The average two-year fixed rate ranged from 4.5 per cent to 4.9 per cent, depending on the size of the loan compared to the value of the house, according to property website Rightmove.

Zoopla’s executive director Richard Donnell said the tight rental market was one reason first-time buyers had remained in the market. UK rents have risen by one-fifth over the past three years, costing the average tenant an extra £2,220 per month, according to the company.

“Mortgage repayments are below rental costs in many regions,” said Donnell. “High rental inflation will continue to support first-time buyer demand.”