View all articles
January is a time for the future, an opportunity to look ahead to what might be and to make right the gluttony of Christmas. For those of us with a substantial stake in the property market, it is also an opportunity to ponder what the next 12 months may hold for landlords and the UK’s housing market.
Whilst this Christmas may not have been a gluttonous one for landlords, the last 30 months have certainly seen house prices bulge. The average house price has risen a staggering 24% since March 2020. However, the UK’s house price binge is set to come to an abrupt stop, with the majority of industry bodies predicting a sharp fall in house prices throughout 2023.
What Do the Experts Predict?
Simply, all of the 13 forecasters surveyed expect house prices to fall during 2023. Whilst the belief that house prices will fall this year is nearly universal, there remains a significant variation in the degree to which house prices are forecast to fall. At the top end of the spectrum, Savills suggests that the average UK house price will decrease by 10% over the next 12 months. Whereas at the other end of the spectrum, Chesterton’s forecast a more conservative 1% reduction in house prices. Broadly, the consensus is that house prices will fall somewhere between 5% and 8%, with the average estimate coming in at 6% for the year.
“The housing market has remained remarkably strong through the first nine months of 2022, but demand dynamics changed over the autumn with the realisation that the Bank of England would need to go faster and further to tackle inflation.
A new prime minister and fiscal policy U-turns appear to have reduced some of the pressure on interest rates, but affordability will still come under real pressure as the effect of higher interest rates feeds into buyers’ budgets. That, coupled with the significant cost of living pressures, means we expect to see prices fall by as much as 10% next year during a period of much-reduced housing market activity.
There are several factors that will insulate the market from the risk of a bigger downturn as seen after the financial crisis. Borrowers who haven’t locked into five-year fixed rates had their affordability heavily stress-tested until August this year. This, combined with relatively modest unemployment expectations and signs that lenders are looking to work with existing borrowers to help them manage their household finances, should limit the amount of forced-sale stock hitting the market next year.”
As Halifax Homes Director, Andrew Asaam, points out, it is worth putting any potential house price fall into perspective:
“It’s important to remember we saw some of the biggest house price increases the market has ever seen over the last few years. Between March 2020 and August 2022, the average house price increased by nearly £55,000 (23%) to £293,992, a new record high”.
Halifax predict that house prices will fall by 8% in 2023, with:
“such a fall placing the average property price back at roughly the level it was in April 2021, reversing only some of the gains made during the pandemic”
Iain McKenzie, CEO of The Guild of Property Professionals, concurs with this:
“After hitting an all-time high of nearly £300,000 in the summer, house prices have now fallen back below the level they were in March. There’s no need to panic, as a readjustment in the market was to be expected following more than two years of inflated house prices. Fortunately for sellers, the demand for quality housing is still high, and many areas of the country are still seeing a shortage of stock, which will keep prices buoyant in the months ahead.”
Although house prices are set to fall. The decrease is more likely to be a correction than anything akin to the crash in prices witnessed in 2007.
“The risks are skewed to the downside, but there is still a good chance that we can achieve a relatively soft-landing next year with activity stabilising modestly below pre-pandemic levels and house prices edging lower, perhaps by around 5%,”
It is worth noting that the forecasts given are of the nominal change in house prices. That is, they do not account for the impact of inflation on the purchasing power of your money and thus the real value of your property. Most estimates suggest that inflation will begin to tail off over this year but should still reach somewhere between 5% and 7%. Therefore, the true – or ‘real’ – fall in house prices when inflation is taken into account will likely be in the region of 10% and 15%.
Will All Houses Be Affected the Same?
As this blog has continually highlighted, the UK is not one homogenous housing market. It is instead made up of countless smaller regional markets, each with its own dynamics and forces in play. As such, the sensitivity of house prices tends to vary by region, with some outperforming and others underperforming the average.
S Savills, the FTSE-listed real estate services company has predicted the most severe fall in house prices in 2023, with a forecasted reduction in prices of 10%. However, they have taken care to highlight the difference in house price performance by region, with areas in the North of England outperforming the South. The North West, North East and Yorkshire & The Humber are forecast to be the regions which are most sheltered from falling house prices. Savills, suggest that house prices in these regions will fall by 8.5%, compared to London and the South East, where house prices are set to fall between 11% and 12.5% in the same period. Equally, Savills predicts that in the longer run, properties in the North of England will bounce back faster, with the three aforementioned regions seeing house price growth of over 20% between 2024 and 2027. Comparatively, Savills does not expect house prices in London to have bounced back even by 2027.
It is not just regional differences which influence the sensitivity of properties to a fall in average house prices. Savills are keen to point out that the Prime housing market – that is the top end of the market – will be noticeably more insulated from house price falls than other segments of the market. High-end properties typically attract a larger proportion of cash buyers and households which own their properties outright, making them more resilient to rising mortgage costs. As such, Prime properties in Central London are only expected to fall by 2% throughout 2023.
What Is Causing House Prices to Fall?
House prices over the past decade have been inflated by a bubbling cocktail of cheap finance, lavish government policy and supply imbalances. Although supply imbalances remain, one of the key ingredients to this cocktail has begun to run short. Pandemic-related supply shortages have driven up inflation, forcing the Bank of England to raise the Bank Rate from its historically low levels. Markets are pricing in that the Bank Rate will peak at 4% in 2023, with mortgage rates rising in tandem. At the same time, roaring inflation is eroding the real value of household incomes, pushing many families into a cost-of-living crisis. Naturally, in an environment where households have less to spend and are unable to borrow as much, house prices must react accordingly.
Andrew Asaam, of Halifax Homes, highlights:
“Looking ahead to next year, it will clearly be a more challenging economic environment and the housing market will continue to rebalance to reflect these new norms. Though the limited supply of properties for sale will continue to support prices, the pandemic-driven surge in demand has receded, and we’re emerging out of more than a decade of record low-interest rates. Unemployment is expected to rise and reach around 5.5%. This is relatively low by historical standards but will be challenging for many people. While inflation as a whole may be close to or at its peak, household energy bills are likely to rise again, putting more pressure on household budgets.”
A Mixed Outlook for Property Transactions
It’s not only house prices which play an important role in the functioning of the housing market. The number of house transactions is also a key barometer of the health of UK housing. Again, leaning towards the more pessimistic side, Savills expect transactions to fall below 900,000, the lowest level since 2012. The biggest factor driving the fall in transactions is expected to be the reluctance of first-time buyers and buy-to-let investors to purchase properties. Both types of buyers tend to lean more heavily on borrowing to fund purchases and the increase in mortgage rates is expected to hit them especially hard, forcing them to delay purchases.
Richard Fearon, chief executive of Leeds Building Society, said:
“Our research shows that 81% of aspiring first-time buyers say that the cost-of-living crisis has made it harder for them to save for a deposit and almost half of them now doubt they will ever get onto the housing ladder.”
However, recent data from December suggests that there is cause for optimism in 2023. In December, Rightmove registered an 11% increase in views for homes for sale when compared to the previous year. Rob Kennedy, Director at Philip James Kennedy in Didsbury, says:
“The month of December is a good market barometer as we register the most proactive buyers who are planning on moving in early 2023. Whilst there are fewer viewings and new instructions in December, we encourage as many new sellers as possible to launch their properties mid-December, as they enjoy high levels of internet activity with clients watching video tours and considering moving over the festive period.”
Will House Prices Bounce Back In 2024?
Whilst there is a strong consensus that house prices will fall in 2023, there remains more debate about what will happen to house prices going into 2024. Savills, who have predicted the sharpest decrease in 2023, expect house prices to bounce back into positive territory between 2024 and 2027. However, the Office For Budget Responsibility (OBR), who estimate a 6.1% reduction in house prices this year, believes house prices will continue falling through 2024, with prices falling by a combined 9% by autumn of that year.
Knight Frank, who forecast a more optimistic reduction in house prices of 5% in 2023, believe that prices will continue falling in 2024. They forecast that the average house price in the UK will fall a further 5% in 2024, amounting to a decrease of more than 10% over the coming years. However, they suggest house prices will begin to pick back up in 2025 before rebounding more strongly in 2026.
References
BBC. (2022, November 18). UK house prices forecast to fall for the next two years. Retrieved from www.bbc.co.uk: https://www.bbc.co.uk/news/business-63676119
Knight Frank Group. (2022, October 5). UK House Price Forecast 2022: prices to fall as mortgage costs rise. Retrieved from www.knightfrank.com: https://www.knightfrank.com/research/article/2022-10-05-uk-property-market-forecast-updated-october-2022
Reuters. (2022, December 20). UK’s Nationwide forecasts 5% house price fall for 2023. Retrieved from www.reuters.com: https://www.reuters.com/world/uk/uks-nationwide-sees-5-house-price-fall-2023-2022-12-20/
Rightmove. (2022, December 13). House price forecast: what will happen to asking prices in 2023? Retrieved from www.rightmove.co.uk: https://www.rightmove.co.uk/news/articles/property-news/house-price-forecast-2023/
Savills PLC. (2022, November 3). Savills forecast a 10% fall in the average UK house price, but return to peak in 2026 as affordability pressures ease. Retrieved from www.Savills.co.uk: https://www.savills.co.uk/insight-and-opinion/savills-news/335136/savills-forecast-a-10–fall-in-the-average-uk-house-price–but-return-to-peak-in-2026-as-affordability-pressures-ease
This is Money. (2023, January 2023). House prices slumped 2% in December, says Halifax: Lender forecasts 8% drop in 2023 as cost of living crisis weighs on property market. Retrieved from www.thisismoney.co.uk: https://www.thisismoney.co.uk/money/mortgageshome/article-11605919/House-prices-fell-2-December-says-Halifax-predicting-8-drop-year.html
