Why buying a flat might not be such a good idea
I spent a large part of my childhood living in flats. My first home was on the 25th floor of a building in Hong Kong. Since then, I’ve lived in apartments around the world. But when looking to buy a home in England, I gave them no consideration whatsoever. Flats can be large and grand, or small and convenient — but in this country at least, they have been a distant second to houses for years.
Today, with property prices rocketing upwards, some buyers — especially first-timers — may feel the need to rush and buy a flat or risk forever missing out. Yet the current boom does not extend to all homes equally: house prices are rising rapidly, but prices for flats are not. While lower price growth is welcome, the underperformance of flats relative to houses highlights some serious issues. If you’re planning to trade up to a house eventually, you might, in some circumstances, actually be better off not buying a flat at all, and saving and renting instead.
This is quite the turnround. Between 1997 and 2007, flats were the joint fastest-growing property type in England, rising, on average, 13 per cent per year. Between 2007 and 2017 — while overall growth was much lower — they were still the fastest-growing type of property, averaging 3 per cent per year.
Since 2017, that’s all gone out of the window. Flats are now the slowest-growing property, up about 2 per cent per year, on average, compared to detached houses, which grew 6 per cent per year.
So why has this happened? It’s tempting to blame the pandemic — with its race for space and the flight from urban areas — but England’s market for flats already had some serious challenges years before.
The first problem was the introduction of the 3 per cent additional stamp duty rate in April 2016. This led to a spike in activity as investors and buyers of second homes rushed to beat the tax deadline. Once this subsided, the number of annual house sales returned to normal levels, but sales of flats fell. By December 2019, apartment sales were 21 per cent lower than just five years previously — highlighting just how important investors are to the market for flats.
Then, in 2017, London’s Grenfell Tower caught fire, killing 72 people and causing a building safety crisis. Many flat owners discovered they lived in homes deemed unsafe; many more struggled to sell because mortgage providers refused to lend on homes that did not have the correct fire safety certification.
For affected owners, the end is hopefully in sight: new legislation should provide more protection and limit the cost of remediation. But the market may have been irreversibly harmed. It has also increased focus on the position of leaseholders in English law and highlighted the lack of control they have over building repair costs, service charges and ground rents. It appears that while an English person’s house may be their castle, a flat is definitely not.
The popularity of new-build flats had started to wane even before the Grenfell disaster. Since the financial crisis, thanks to the UK government’s Help to Buy scheme and other planning policies, housebuilders have shifted delivery away from flats towards larger houses on greenfield land.
The drop-off you can see in chart 3 is overstated: more comprehensive EPC data — which includes buildings converted into flats, housing association flats and the build-to-rent sector, which institutional investors have been piling into — shows a consistently higher proportion of new-build flats being built in recent years. But even if we take this into account, there are signs of weaker demand for flats. Perhaps partly reflecting concerns about oversupply in some city centres, many build-to-rent investors are now shifting their attention towards houses — the so-called Single Family Rental market.
of homes in Scotland are flats — against just under 25% in England
As for the pandemic, the flight from urban areas has been exaggerated: rents are now shooting up in cities across the UK and across the west. But it has clearly caused people to re-evaluate their housing options. Houses tend to offer more space, are more likely to have a garden, and benefit from having no neighbours above or below. But they cost more. As chart 2 shows, the number of house sales last year rose rapidly above previous levels, while the number of flat sales only returned to pre-2016 levels. This suggests that while houses are preferred, for some, buying a flat is a better proposition than the options on the rental market — though the data also reflect landlords using the stamp duty savings to invest further.
So why is this a problem? It is linked to the notion of the housing “ladder” — a central pillar of the British public’s and government’s attitude to housing over the past half-century. The idea is that you initially stretch your finances while still young to buy a small flat of your own. Then, as your earnings increase, you can afford to trade up to a terraced or semi-detached house. Then, thanks to a combination of rising property prices, career progression, inflation and falling interest rates, you can afford to trade up to a larger detached home.
But this is too simplistic. It may be true that first-time buyers are more likely to buy a flat than mortgaged home-movers (in 2020, 21 per cent of first-time buyers bought houses, compared with 7 per cent of movers). But the majority of first-timers buy a house — and have done for the past 30 years. The risk is that flats end up being the only option for those struggling the most to buy their own home.
Flat-buyers’ more fortunate peers — who perhaps have more help from the “bank of Mum and Dad” or qualify for Help to Buy — manage to jump a rung or two while they end up stuck in a flat that underperforms relative to the houses they aspire to own one day.
If price growth slows or even falls (a real possibility, given the cost of living crisis and rising mortgage rates), the relative gap between the price of flats and houses could get even wider during a period when the ability to build equity and borrow more will be constrained. Buying a flat won’t always make trading up to a house easier.
It doesn’t have to be this way. Many other countries offer lessons on how to make flats work better for households of all shapes and sizes. The solution appears to be a combination of design, construction, legal framework and — perhaps most difficult — public attitude. Just under one quarter of England’s housing stock is flats, in Scotland that proportion of homes is nearly 40 per cent — partly thanks to tenements in Edinburgh and Glasgow. Indeed, my final home as a teenager was an Edinburgh New Town flat. It was great for stumbling back to from the pub, but there were still the noisy neighbours and other challenges of high-density living to contend with.
Buying a flat may come with more downsides than a house, but sometimes it’s the only option — perhaps due to budget or personal circumstances. And while it may fail to keep track with the value of nearby houses, there are other — arguably more important things — to consider than future price performance when buying a home.
Neal Hudson is a housing market analyst and founder of the consultancy BuiltPlace