According to the latest house price index from the Office for National Statistics (ONS), there is just a £6,000 gap between the cost of the average flat and terraced house in Great Britain. However, national averages are skewed by location. This means they don’t reflect the true cost of upsizing most movers face. There are more terraced houses in the North of the country and flats in the South, which pulls down the average price of a terraced house and pushes up the price of a flat on a national basis.
To get a more accurate picture, we've adjusted the ONS figures to compare the gap between flats and terraced houses in the same location. This location-adjusted data reveals a £97,000 wide gulf, which has widened from £69,000 in the year before the pandemic. The change of many homeowner’s preferences over the pandemic period is increasingly looking permanent.
This widening gap has been exacerbated over the last couple of years by the extra cost of borrowing. In 2019 it would have cost an extra £275 in monthly mortgage repayments to bridge the gap, but by 2024 this figure had more than doubled to £570. In both cash and percentage terms, the gap tends to be largest in expensive markets across the South of England.
While the extra cost of borrowing the money to trade up from a flat to a house has become much more expensive, in recent years the challenges of trading up have been compounded by:
- Flat owners tend to move on sooner than house owners, which limits the amount of equity they can build up in their property.
- Flat prices have mostly been growing more slowly than house prices since 2017, further widening the gap in value between the two property types.
- The stamp duty exemption for first-time buyer purchases below £425,000 means many new buyers use their exemption on a flat, before having to pay full rates on a house.
However, we are now probably fairly close to the point where the financial stress of selling a flat to buy a house will start receding. Higher interest rates have supported flat values, relative to the price of other homes, as new buyers look at more affordable options. This means that in 2024, price growth for flats and houses has tracked each other more closely.
As rates begin to fall, we should see the cost of trading up decrease. However, this will predominantly be driven by falling interest rates reducing the cost of borrowing, rather than the price gap between flats and terraced houses narrowing. For the average person trading up, each 0.25% fall in interest rates knocks in the region of £10 per month off the cost of upsizing to a terraced house.
If mortgage rates drift downwards during 2024 and 2025 as markets predict, we expect growing numbers of flat owners to start thinking about upsizing. Most of these owners bought between 2014 and 2019 as the market strengthened significantly and are now approaching the average length of stay in a flat. Help to Buy also peaked during these years and was the catalyst to help many flat owners into homeownership.
Most of these households won’t have seen big rises in their equity from price growth, often owners will simply be looking to recoup what they paid for their home. However, with 8-10 years of mortgage repayments behind them, coupled with the falling cost of borrowing, trading up to a house is likely to become an increasingly realistic proposition for a growing number.
