Valuation gap narrows significantly while purchasing power improves over the past three years
Improving affordability conditions have provided the UK housing market with more stable ground after three years of weak performance, according to a report published by global economic research and advisory firm Oxford Economics.
The data analytics provider’s home buyer affordability index reveals that the substantial overvaluation of properties witnessed in late 2022 has largely reversed, with the pricing gap contracting to manageable levels as borrowers’ purchasing capacity has strengthened materially.
During Q4 2022, when mortgage rates surged following the mini Budget turmoil, homes commanded a premium of 33% above their intrinsic value. This disparity has since narrowed to merely 4%, a shift that directly explains the uptick in lending volumes and property valuations documented throughout recent months.
The improvement in the affordability environment stems from two key factors working in tandem. Real wage growth has remained robust over the past three years, while fixed mortgage rates have declined steadily from their peaks. This combination has substantially eased the burden of monthly repayments for borrowers on standard two and five-year fixed rate products.
“Pay growth is slowing, and financial market pricing already anticipates further rate cuts, suggesting limited room for swap rates and mortgage rates to fall from their current levels.”
Despite the prospect of modest rate reductions ahead, the supply challenge remains acute. Approximately 90% of existing mortgages are fixed rate products, meaning borrowers have faced substantial increases in repayments as older, cheaper deals have matured. New house building has contracted, compounding the shortage of properties available for purchase.
These conditions are likely to sustain upward pressure on house prices over the coming years. Oxford Economics projects price growth to accelerate from 2.4% in the final quarter of this year to 3.4% by late 2026 and 3.6% by the end of 2027.
However, the trajectory for borrowing activity presents a different picture. “With further affordability gains expected to be modest, mortgage activity is likely to plateau from early 2026 at levels similar to those seen before the pandemic,” Goodwin concluded.
This means that mortgage brokers will likely face a moderating market ahead. Advisers should prepare for stabilised, slower-growth conditions and anticipate increased competition as overall lending volumes flatten.
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