Flats vs Houses: The Gap Just Hit a Record

Good morning,

Quick question. If a flat and a terraced house were on the same street, how much cheaper would you expect the flat to be?

In 2016, the average UK flat cost about the same as the average terraced house.

Today, the flat is 17% cheaper. That's the biggest gap since the records began in 2005.

So are flats the bargain of the decade, or is there a reason nobody wants them?

Let’s dive in.

In this newsletter, you'll find...

• The flat discount nobody's talking about

• If you remember one thing, make it this

• Feedback

The flat discount nobody's talking about

You've probably seen the headlines. Zoopla says flat prices have now fallen for 15 months in a row, while house prices are still rising (Property Industry Eye).

But one bad year isn't the story.

The test I ran

For every council area in England and Wales, I took the average flat price and the average terraced house price from the Land Registry's House Price Index. Then I divided one by the other.

Here's what came back:

• UK: a flat costs 83% of a terraced house, down from 102% in 2016

• London: 66%

• South East: 64%

• 305 of 317 areas: at their lowest level on record

This isn't a London problem. It's almost everywhere.

What that looks like in real life

Take Birmingham. Average flat: about £145,000. Average terraced house: about £222,000.

In 2016, a Birmingham flat cost 78% of a terrace. Now it's 65%. The gap has grown to £77,000.

Zoom out and it gets starker. Over 10 years, UK flats rose 17% and terraced houses rose 43%. But everyday prices rose about 42% over the same period (ONS).

So after inflation, the average flat is worth roughly 17% less than it was in 2016. In London, flats are actually lower than 2016 before you even count inflation.

Why flats fell behind

A few things are working against them:

• Running costs. Service charges and ground rent keep rising, and buyers are adding them to their sums.

• Cladding worries. Since Grenfell, some flats have been hard to mortgage or sell.

• They sit on the market. In London, a third of flats coming up for sale have already been listed in the past year (Property Industry Eye).

And more flats are coming

The regulator that signs off tall buildings is reviewing schemes covering 40,644 homes. 55% of them are in London (Building Safety Regulator).

More supply usually means less room for prices to rise.

The bit landlords will like

When prices fall but rents don't, yields go up. Paragon says the average flat yield (rent as a share of the price) has risen to 6.66%, up 0.40 points in a year. That's the biggest jump of any property type (MPA).

So what do you do with this?

If you're a first-time buyer, a flat can get you on the ladder for far less. Just check four things before you offer:

1. Service charge. Ask for the last three years. Is it rising fast?

2. Lease length. Under about 80 years and it gets expensive to extend.

3. Cladding paperwork. Ask if the building needs an EWS1 form. If it does, check one exists.

4. Resale history. Search the building on the Land Registry. Are past owners selling at a loss?

If you're an investor, subtract the service charge from that yield before you get excited.

Also, the new Your First Home scheme only covers new builds (City AM). Be careful paying a new-build premium you can't get back when you sell.

If you remember one thing, make it this

A cheap flat isn't automatically a good deal. The discount is real, but some of it is there for a reason. The best flats are the ones where the gap is big and the problems are small.

Full details of Your First Home land at the Budget on 28 October, and fresh price data comes out on 21 October. I'll be watching both.

Would you buy a flat right now, or hold out for a house?

Hit reply and tell me. I'd genuinely like to know.