Inflation of goods and services has pushed up service charge costs for leaseholders across England & Wales, more than twice the rate of inflation and marked the fastest rate of annual growth since our records began in 2016,latest data from Hamptons reveals.
At the end of Q1 2024, the average service charge on a flat stood at £2,247 per annum, 31% higher than in Q1 2019.
Service charges are typically set on estimated costs, so when inflation pushes costs upwards, the impact on service charges tends to be delayed.
By the end of Q1 2024, 19% of flats had a service charge below £1,000 per year, a figure which has fallen annually from 33% in 2016. In London, just 14% of flats have an annual service charge below £1,000. Based on their current trajectory, there are unlikely to be any flats offering a sub £1,000 per year service charge within a decade.
The service charge for a one-bed flat in England and Wales averaged £1,940 at the end of Q1 2024, with 75% of leaseholders paying more than £1,000 per annum.
Meanwhile, the average service charge for a two-bed was £2,311 with 84% paying more than £1,000 a year. And the average three-bed stood at £3,044, the first time the annual charge has crossed the £3,000 mark. 89% of three-bed leaseholders are paying more than £1,000 per year.
GOING UPWARDS
Average service charges in five of the 10 regions across England and Wales are now above £2,000 per year, while five years ago in 2019 no region had average service charges at this level. 81% of changes to service charge bills in the year to Q1 2024 moved in an upward direction. Around 5% of leaseholders now pay more than £5,000 per year.
The average annual service charge in the capital is now £2,581 which represents an increase of 9.0% over the last 12 months. Service charges in London are higher than anywhere else in the country. This reflects the higher cost of living in the capital and the fact that larger more complex city buildings tend to come with higher running costs over their lifetime.
First-time buyers are becoming more exposed to rising service charges since they are now purchasing the largest share of flats since 2015 when our records began.
This comes as they downsize their first home expectations in the face of higher mortgage rates. A record 36% of flats were bought by a first-time buyer in Q1 2024.
This means a rising share of new buyers are paying service charges on top of their mortgage. In some cases, this will reduce the amount they can borrow.
First-time buyers overtook landlords in 2016 as the second-largest group of apartment purchasers. If current trends continue (which will probably be determined by the level at which interest rates settle), they will overtake movers (currently 47% of all flat buyers) as the largest buyers of flats in 2026.
RISING SERVICE CHARGES
David Fell, HamptonsDavid Fell, Lead Analyst at Hamptons, says: “Rising service charges mean buyers are increasingly wary of the additional ongoing cost to their home purchase and are carefully weighing up the value for money they offer. Higher mortgage rates have already financially squeezed many would-be flat buyers, and with more taking on service charges as well, it’s often limiting how much they are able to borrow from the bank.
“With buyers going through service charge accounts with an increasingly fine toothcomb, they’re more informed than ever about how much they’ll be paying each month and what they’ll be getting back. This means the value of flats where the service charge is disproportionate to the services on offer has come under downward pressure.
“Service charges are usually based on forecasted running costs for the year ahead. But inflation has been pushing these costs above what was pencilled in, meaning today’s higher bills reflect inflation which has been running hot for much of the last 18 months.
“Alongside this, the first generation of city centre flats are now thirty years old and are starting to show their age, often approaching the point when they need an injection of cash.”
