Investors interested in the UK property market might be wondering: are flats a good investment over houses? Well, according to Zoopla’s House Price Index released in January, there has never been a wider gap between the price of flats and houses. Yet, demand for one and two-bedroom flats has grown 5% in a year, whilst demand for 3-bed homes has fallen by 5%, as rising costs tighten buyers’ budgets.
Since 2013, the price of houses has risen from £194,263 to £308,176, whilst the value of flats has increased from £133,643 to £183,331 (Zoopla). Houses have always been more sought-after than flats, and 3-bedroom houses remain the most in-demand properties on the market.
However, this year, we are already seeing a shift in demand towards flats as new home buyers suffer a hit to buying power. Out of all new buyers, 27% are looking for one and two-bedroom flats, up from 22% only a year ago. As the pressure of rising costs mounts, the demand for more affordable homes will continue to rise, leading to a noticeable shift in the UK property market.
In London, budgets are even tighter. Almost half (49%) of all new buyers are looking for one and two-bed flats, up from 42% a year ago. Demand for smaller properties here is so much higher than elsewhere in the country, simply because property in the capital is so expensive. Much fewer people can afford a 3-bedroom home in London.
In fact, more people are struggling to afford 3-beds outside of the capital, too. Demand has fallen by 5% to 39%, demonstrating the hit to buying power across the country.
According to Zoopla, the average price for a 1-bed flat is £150,000, while a 2-bed flat will set you back by around £196,000. However, 3-bed homes will cost you £293,000 on average, which is almost £100,000 higher than a 2-bed property. With rising prices and soaring mortgage rates, it is easy to understand why fewer people are purchasing large homes.
So where is the demand for flats rising? Markets adjacent to big cities are seeing noticeable growth. City living is becoming increasingly expensive, so it seems people are opting to live outside of the city, yet at a commutable distance, where prices are cheaper. Chelmsford, Guildford and Dartford are a few of the favourites outside of London, whilst Huddersfield, Stockport and Wakefield are also seeing a growing demand for smaller properties.
Demand for first-time homes is expected to increase as people try to escape rapidly rising rents. That said, with house prices forecast to decline this year, first-time homebuyers may be holding on for a better deal.
Meanwhile, those thinking about moving may be waiting for mortgage rates to decline further.
This year can go one of many ways, but one thing is clear: affordability is a factor at the forefront of buyers’ minds, and the cost of living crisis isn’t going anywhere anytime soon. Right now, the price between flats and houses has never been wider, making flats an attractive option for those looking for an affordable deal. Meanwhile, the current economic situation is causing a surge in demand for smaller properties, and this will continue to push the value of flats up.
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