It’s hard to escape the gloom and doom at the moment. From strikes to cost of living crisis, rising interest rates for landlords and homeowners plus upward pressure on rents as applicants struggle to secure a property in a very tight lettings market. Whilst we still await official confirmation, The Bank of England predicts that we are already in a 2 year recession. Scratch below the surface and there is some positivity – so hunker down in the short term because it should get better in a year or so.
2023 is going to be challenging for the housing market in the UK. But fortunately, there is little likelihood of a long, protracted period of contraction. Many commentators think that inflation already peaked at 11.1% in November 2022. If that is the case, we are likely to see bank base rate, currently 3.5%, peak in the next few months and then start to fall. The most optimistic predictions hope for a peak of 4%, with gloomier commentators expecting 4.75%. If inflation is nearing the Bank of England’s target of 2% by this time next year, we should begin to see the light at the end of the tunnel. There are many unknowns, in particular energy prices and ultimately the fate of the war in Ukraine. The two are intrinsically linked.
There is a broad consensus that house prices in the UK will fall in 2023 with predictions ranging from 5% to 12% and there is solid data that points towards this trend. The latest figures for mortgage approvals showed a decline of just over 10%. Zoopla reported in November 2022 that buyer enquiries had declined by 25% nationally and by 40% in London and the South East. Halifax data shows monthly house price increases peaking in August and falling month by month thereafter. This marks the longest contraction since 2008. The annual rate of house price inflation stands at just 2.3% and declines in 2023 look very likely.
Speaking on BBC Radio 4’s You & Yours programme, Lucian Cook, Head of Residential Research at Savills says that first time buyers and buy to let borrowers will face the brunt of the mortgage interest rate increases. Fixed rates peaked at more than 6% according to Moneyfacts in October 2022 and we are now seeing 5 year fixes closer to 4.5%. But there is no doubt it is not a great time to remortgage or product switch. The problem is that 2 million borrowers will come off a fixed rate in the next 2 years. Many of them will face the shock of coming off a 2 year fix at below 2% and will be looking at tracker rates – if they can get them – at 4% and more. Those lucky enough to have clinched 5 year fixes at or below 2% this time last year are clinging to them for dear life.
The main drivers of falling house prices will be fewer buyers, deterred by higher interest rates. Landlords will continue to be driven out of the market by unfair taxation on their turnover with some paying 120% tax or more. The spectre of the Renters Reform Bill which will create open ended tenancies and end no fault eviction are also a factor. 23% of landlords told the NRLA that they are thinking of selling in the next 12 months, whilst 14% say they plan to buy. Although, this could put further pressure on the supply of rental properties, some commentators believe that a balanced supply of properties for sale could ensure that house prices have more of a soft landing.
Knight Frank, Savills and Capital Economics lead the pack with predictions that prices will fall by 10% – or 12% in the case of Capital Economics. Credit Suisse predicts falls of 7-10%, Pantheon Macroeconomics 8% and JLL, Nationwide and Liberum are at the lower 5-6% end of predictions.
Lucian Cook says that we are likely to see higher falls in mainstream London markets where the relationship between house prices and incomes has the greatest multiple. But wealthier house buyers in prime London are less likely to be impacted by increasing mortgage rates and prices could hold up better as a result. Fewer affordability pressures mean that prices in the North may suffer less too.
Remember that there will always be people who have to move for their jobs – so called needs based buyers. Also, death, debt and divorce will continue to drive sales. Meanwhile research by Hamptons reports that the race for space – where lockdown prisoners fled the capital to rural areas from 2020 into Spring 2022 – predicts that these buyers will decline by 20% in 2023. Lucian Cook says that buyers constrained by mortgage affordability are likely to seek the house that meets their needs rather than their aspirations.
Recent data also points towards a peak in the rental market. Foxtons said that rents fell by 3% from October to November 2022. Supply was up by 7%, but the number of tenants fell by 26%. There were however still 15 renters competing for each property – but down from a record 28 in October 2022.
Many anticipate that first time buyer reluctance to buy in 2023 will mean that more of them will have to rent, so that should keep the lettings market buoyant. But the Foxtons figures and similar data from Chestertons also suggests that the post Covid flight of renters back to the capital is subsiding. Chestertons says that rents rose by 19% year on year in 2023 – but note that is let property that came onto the market – ONS figures for renters in situ shows a 4% rise across the UK in the year to November 2022. Chestertons predicts a modest 5% rise in rents in 2023.
