Market News

Rising house prices feel like good news for a nation of property lovers, so when they hit a new high in January, homeowners tended to feel a bit richer and more pleased with themselves. However, rising house prices aren’t unalloyed good news. In fact, they can do damage to our financial resilience.

It causes headaches for anyone who wants to trade up to a bigger or more expensive home, and needs to breach a bigger gap.

It can also be a nightmare for first-time buyers, who may manage to scrape together a deposit, only to find that rising house prices have moved the goalposts and they still can’t afford the property they need. Even if they can build a big enough deposit, they have to be able to afford the monthly mortgage payments, which are also on the rise.

It’s hardly surprising that so many people have given up on their property-owning dreams. The trouble is that this is could only be the start of their financial problems. Those who are priced out face renting for life, which swallow a disproportionate amount of their income.

As a result, the Hargreaves Lansdown Savings & Resilience Barometer shows they have an average of just £62 left at the end of the month, compared to those with a mortgage who have £309. It means fewer than half have managed to put aside enough emergency savings (46%), compared to three quarters (74%) of those with a mortgage.

Read more: How to negotiate house prices

As people get older, the problems for renters gets even more intense. Only 16% of renters are on track for a moderate retirement income — compared to 52% of homeowners. And they don’t just need a moderate income, they need even more to cover the cost of renting in retirement. It means those on the tightest budgets need to put aside the most for retirement, and in many cases it’s just not feasible.

If people overcome these hurdles and buy, their problems aren’t over, because there’s a risk they’ll have overstretched their finances in the process. It hits in the short term, when home movers have to find an average of £4,000 to cover the cost of the repairs and maintenance the previous owners had managed to hide.

Given that so many will have spent their emergency savings on the move, it can leave them high and dry. If they’ve cut pension contributions or investments to make the move, they need to get back on track with longer-term plans too.

This can be tricky, particularly if monthly payments are continually stretching their finances. You can see the impact by looking at the difference in the cash left over at the end of the month between older Gen X homeowners — who bought when property was more affordable, and have £369 left — and younger buyers Gen Z and Millennial home homeowners, who paid a higher price and have £271. It leaves less spare cash for rebuilding their financial resilience.

What you can do

Buyers need all the help they can get with a deposit and the cost of the move, to avoid overstretching. It’s one reason why 40% of first-time buyers rely on help from their family.

Read more: HSBC launches sub-4% fixed mortgage rate

If you don’t have the luxury of a family with money, you can still get help from the government through a lifetime ISA. If you’re aged 18-39 and have at least a year until you plan to buy, you can pay in up to £4,000 every tax year and get a 25% government bonus of up to £1,000.

If you've already bought and but are worried about the shortfalls in your finances, it pays to get stuck into rebuilding as soon as possible.

If money is really tight, you don’t need to do it overnight. You could pledge to make up for lost time with pension contributions and investments when you get your next pay rise.

The key is not to put it off for too long, or you could spend the rest of your life playing catch up.