Britain is falling back in love with flats (and here’s where to buy yours)

Increasing interest rates on mortgages and surging inflation have sparked a major popularity surge for compact properties.

Is this potentially the most remarkable comeback tale of 2023?

Following a period of decline during the pandemic due to the preference for houses, apartments are now regaining popularity due to the sharp increase in mortgage rates and the ongoing affordability crisis.

According to Zoopla, the property website, 20 percent of potential homebuyers determined to get their foot on the property ladder this year have been looking for two-bedroom flats. This is an increase from 17 percent in the past two years, 2021 and 2022.

In the meantime, the percentage of initial purchasers showing interest in three-bedroom properties has decreased to 40 percent, falling from a peak of 46 percent in 2021.

The need for houses with two bedrooms has also decreased, but there has been an increase in demand for flats with only one bedroom. Additional information obtained from the website Rightmove shows that the number of agreed sales for flats in March was 10 percent higher than the amount observed in March 2019.

Flats account for approximately 20% of residences in the United Kingdom. However, their prices have fallen considerably behind the surging values of houses, particularly in the wake of the pandemic.

Throughout the nation, residential properties are currently appraised at a little over double the cost of apartments. Richard Donnell from Zoopla states that this is the greatest discrepancy in prices observed in the last two decades.

"According to Mr. Donnell, flats have not seen a similar increase in value compared to houses for a couple of reasons. Firstly, the demand for spacious properties made flats a less favored choice during the pandemic. Additionally, buyers were worried about issues with cladding and leasehold charges."

Nevertheless, we anticipate a surge in the demand for apartments during the course of this year as purchasers pursue more favorable cost-effectiveness. Additionally, the government's efforts to address and rectify cladding issues in the majority of buildings will likely contribute to their rising popularity.

Following the tragic 2017 Grenfell fire incident, it became evident that numerous apartment buildings were adorned with flammable cladding materials resembling those that contributed to the fatal blaze.

Individuals who own homes have faced difficulties in selling or refinancing their properties due to ongoing disputes within the property industry regarding responsibility for repair costs. As a result, the value of flats has declined. However, there is now hope for flat owners as Michael Gove, the Secretary in charge of promoting equality in areas of differing development, has stepped in to address the situation.

According to Hamptons estate agency, a study of data from the Office for National Statistics reveals that the typical independent house value has increased by 30 percent or £108,178 in monetary terms since January 2020. As a result, the average price now stands at £464,425.

Semi-detached residences have experienced an increase of 27 percent (£59,385), while terraced houses have seen a growth of 25 percent (£47,371) during this period. On the other hand, flat prices have only risen by 14 percent, equivalent to £27,583, reaching an average value of £228,242.

According to David Fell from Hamptons, the prices of detached houses are now decreasing significantly as the demand for larger living spaces has reached its peak and expenses are starting to have an impact. Fell states that on a yearly basis, more than half (57%) of local authorities are seeing a decline in the value of detached homes, while only 8% are experiencing a decrease in prices for apartments.

According to Mr. Fell, the discrepancy in prices between houses and flats would have naturally lessened over time. However, the increase in interest rates has undeniably expedited this process by rapidly decreasing affordability.

Numerous individuals entering the property market for the first time and seeking to purchase a house have been required to modify their anticipations. Additionally, individuals residing in flats and aiming to upgrade to a house have found themselves obligated to retain their current residence for an extended duration to bridge the gap in property value.

Due to persistent and elevated inflation, the Bank of England has decided to raise the official interest rate by 0.5 percentage points to 5pc, reaching its highest level in the past 15 years. As a result, the financial markets anticipate a potential climb in the Bank Rate, nearing 6pc by the conclusion of the year, which would be the highest seen since 2000.

Increasing interest rates are already causing the expenses of fluctuating and unchanging-rate home loans to rise. In the current period, the mean rates for two-year home loans reached 6.66%, which is the highest it has been in the last 15 years.

This is creating additional stress on the quantity that buyers can borrow or are willing to borrow. And it's not just the people who are just getting started in the housing market who are impacted – those who are looking to downsize are also choosing to move into smaller homes sooner than they originally intended. They are doing this to find a place that is simpler and less expensive to take care of, and where they can have lower energy expenses.

According to Mr. Fell, people who are downsizing early are purchasing smaller homes in order to clear their current mortgage. This is helping to maintain the prices of one and two-bedroom houses, whereas the market for larger family homes has cooled down due to the expensive nature of upgrading.

According to the property guidance firm reallymoving, a significant 30 percent of individuals relocating homes in 2023 have chosen to downsize, which means purchasing a less expensive property than the one they are selling. This figure is higher compared to the 25 percent recorded in 2021.

Nonetheless, the attractiveness of apartments in metropolitan regions is not solely driven by financial pressures. Employers now have higher expectations for their employees to return to physical offices, and individuals who previously escaped cities in favor of countryside locations during the pandemic are now realizing their regret.

According to Ed Lewis from Savills estate agency, the attractiveness of the scenic landscapes in the English countryside might not be as powerful as before.

The changes happening in the travel industry and the additional duties and expenses related to taking care of a house and garden have made living in a city apartment, where everything is conveniently located nearby, an attractive choice. People who were quick to move to country homes are reconsidering their decision because they long for the lively and exciting atmosphere of city living.

The increasing desire for apartments has been especially evident in the city of London, where flats also constitute a greater percentage of the available housing options.

In April, apartments accounted for 70 percent of all homes sold in London. This percentage has returned to pre-Covid levels and has increased from a low of 57 percent in July 2021. During that time, there was high demand for spacious properties and buyers were eager to take advantage of the remaining time for the stamp duty holiday.

According to Zoopla, the average cost of a house in the capital is now £1.1m, which is 2.3 times higher than the average price of a flat valued at £472,000.

According to Robert Sturges, a representative from Chestertons, a real estate agency in London, individuals might consider purchasing a flat instead of a house due to the increasing cost of living. Additionally, the growing demand for flats can also be attributed to renters who are dealing with escalating rents and determine that, despite higher mortgage interest rates, purchasing a property is a more favorable long-term choice.

Additionally, there has been a significant increase in foreign investors acquiring apartments in the high-end districts of London.

Knight Frank reports that apartments in prime city locations are currently 18 percent lower than their highest prices recorded in 2015. This significant reduction, coupled with the lifting of travel constraints, has motivated buyers to take advantage of these favorable circumstances.

According to James Holroyd, a representative from the purchasing agency Property Vision, there has been a significant increase in international buyers from North America, Asia, and the Middle East. These buyers have been capitalizing on the devaluation of the pound, which has made purchasing property much more appealing. Initially, due to the Covid-19 pandemic, the necessity of having outdoor space was non-negotiable. However, this demand has now diminished.

The waning desire for larger residences and the growing interest in compact dwellings results in certain regions experiencing a boost in apartment prices that surpasses the rate of increase in house prices.

In February of 2022, an examination of ONS data conducted by Hamptons revealed that the prices of apartments were escalating more rapidly than the prices of standalone houses in a solitary governing body. Nevertheless, as of February this current year, the worth of apartments was surging at a faster pace in a total of 47 governing bodies.

The flat prices in the boroughs of Newham and Tower Hamlets in east London have experienced a decrease of only 6 percent compared to houses since January 2020. In these areas, the prices of flats, which currently have an average value of £386,615 and £487,784 respectively, are now increasing at a quicker rate than house prices.

Flat prices in the Greenwich borough have increased at a faster rate than house prices, with flats experiencing a 9% decrease relative to houses.

A similar trend can be observed in Salford, a city in Greater Manchester, as well as in Calderdale, located in West Yorkshire. In both areas, there has been a decline of 10% in the prices of flats compared to houses over the past three years.

In contrast, apartments need to make up the largest amount of lost ground in Westmorland and Furness, Cumbria, as flat prices have dropped by 26 percent compared to houses since the beginning of 2020. Similarly, in the Welsh county of Torfaen, they have declined by 19 percent.

According to Mr Fell, there is usually a similar rate of growth between flats and houses in central urban areas with a large number of flats. We predict that this trend will continue throughout the year in these locations.

However, in more lush countryside regions, the disparity between apartments and houses has developed at a rapid pace and appears likely to continue to exist substantially.