The UK property market is in trouble. 2023 and 2024 will be turbulent years. Here is my UK property market forecast for 2023.
For most of 2022 rising interest rates and the cost of living crisis had not hit the market. Transaction volumes remained above pre-pandemic levels and prices continued to rise.
The Truss government mini budget was the catalyst that changed the momentum. Since then, the market has gone into decline.
In October ONS average UK house prices hit the top of the market cycle at £296,422. Rightmove, Halifax and Nationwide indexes already show prices declining. These are leading indicators, ONS data is circa. 5 months behind.
Zoopla reported a 28% decline in sales agreed during November 2022. Mortgage approvals were 11% below their pre-pandemic average in October. Mortgage approvals reduced most in higher cost locations which are more price sensitive.
Banks currently provide no interest rate spread for different LTV’s. So, someone borrowing at a 95% LTV will be paying the same interest rate as someone with a 65% LTV.
How much will house prices decline?
Forecasts for house prices drops range enormously. Some predict prices will fall by 2 to 3%, others predict a 30%+ decline in house prices.
I think a house price correction will look very different to what people imagine. Of course, some markets will see significant falls in house prices. Those that experienced rapid increases outside of major centres will suffer most. Purchasers paid too much, fueled by low interest rates and herd mentality.
But, across the board prices may not fall as much as people expect.
We may end up in a stalled market. Where prices do not decline as much as many expect and new supply declines. Here is why.
Housing Market Pre-Covid
Before the covid-19 pandemic. Many expected the housing market to collapse. It didn’t, it stalled. Between Dec 2018 and Jun 2020 there was no growth. Transaction volumes were very low. In England transaction volumes were at some of their lowest levels since the GFC. Around 30% of those transactions were new-build property.
Housing Market During Covid-19
The fear of a collapse of the housing market made the government act. It over stimulated the housing market with its stamp duty holiday. The SDLT holiday, working from home and lower interest rates inflated house prices. Since June 2020 house prices increased by 25% (ONS). Growth has been greatest for houses in less central locations. Apartments schemes have not experienced the same growth.
This has further changed the housing supply dynamic. Most developers have left central CBD locations in favour of lower density housing.
Catalysts for Correction
Before the covid 19 pandemic many commentators forecast a housing market crash. Instead of a crash we had nothing. Most owners sat on their hands. Transaction volumes declined and people stayed put. There was no pressure to do anything with interest rates at historic lows. Why sell your property for less than you think it is worth if there is no pressure to do anything?
For a significant price correction to take place ie. a drop in prices of say 30%, you need to assume one (or all) of the following is going to happen:
- Mortgage Pressure – Every quarter in 2023 circa. 300,000 and 400,000 fixed rate mortgages will come to an end. These homeowners will need to re-mortgage at a much higher rates. The resulting financial pressure will force them to sell – at any price.
- Developers sell at a loss – developers account for 30% of sales in England. You need to assume they must sell their properties at a loss. Margins are already under pressure due to construction material and wage inflation.
- Landlord Exodus – crushed by Section 24 and rising interest rates, buy to let landlords will cut and run. They will sell at any price and preserve cash.
All three scenarios could happen, but how likely are they? It is easy to create a narrative around data and say the sky is falling. But will it?
My Property Market Forecast
There is no doubt there will be pressure on prices, but most of the pressure will be in the new build market. Most purchasers will not have the ability to benefit in this space. Here is what will happen in 2023.
- New build premium will shrink as developers look to close out unsold positions. Some developers may well need to discount by up to 20% (or more) on new build developments. Purchasers will need to buy volume to benefit. Large investors are already poised to move into this space.
- New housing supply will drop, particularly for large scale development projects. The nature of developers has changed since 2009. New housing supply could halve.
- International investors will return to the London market in search of a deals. But with the view of buying for yield rather than growth.
- Secondary housing market will be under pressure. Prices will drop but not as much as some forecast. Pressure will be greatest in secondary markets where people overpaid.
- Working from home will decline throughout the year. People will return to homes closer to their places of work. This will impact rental demand in bigger cities where there are few options
Here is why.
Lack of pressure for most people to do anything!
My guess is most property owners will sit on their hands. For property owners to sell when prices are declining, they need to be either:
- Financially distressed and forced to sell
- Highly motivated to move and have somewhere else to go to
This is already playing out as the number of transactions has already reduced since 2008. Sales volumes in England (ONS) in the year ending Mar 2022 were 797,936 versus 1,271,033 in the year ending 2007.
About 30% of the properties sold in 2022 were new build. The secondary sales market is far less active than it has been for many years.
Financially pressured vendors
No doubt some vendors will come under serious pressure in 2023, the most obvious groups are:
- Help to Buy Purchasers – who paid too much when they purchased the property. Some will get into negative equity. Most will have little choice but to hang on, it is hard to imagine the government won’t step in to help them. After all they created the problem in the first place!
- Buy to Let Investors – who own in their own name will get hammered by rising interest rates and s24 requirements. But, Section 24 has been around since 2017 and implemented over 4 years. Most landlords prepared for the tax changes and either sold already or re-geared. Additionally, most who have purchased in the past few years have done so in a company.
- Developers – new build sales rates have declined over the past 3 – 6 months. Developers are under pressure to sell. But very few developers build at scale. The development model changed in response to the Global Financial Crisis (GFC). Those who have properties completing in 2023 will discount to reduce risk. But they are unlikely to do this in the retail market at an individual level. They will discount in bulk to large investors and Build to Rent (BTR) funds. Both groups are looking to buy at a discount.
Motivated vendors
In 2023, there are not going to be that many motivated vendors in the secondary market. The pandemic caused many people to reconsider their circumstances. It created a rise in the number of people retiring and leaving the workforce. Two major reasons why people sell their home. Higher mortgage rates are less of a problem for retirees. They are more likely to have paid off or have a small mortgage.
Many people in this group will down-trade to move closer to friends and family, or to move into a smaller property. Increasing living expenses and the spike in energy prices will add to the motivation to sell.
Most homeowners have achieved significant gains in their home equity. This provides some room for movement if they want to move in the coming year. But new buyers will be price sensitive. Sellers will need to discount if they want to sell. But the vast majority will wait for more favourable conditions. For most people their home is their single largest asset.
Availability of Financing
Many people are drawing comparisons with the GFC in 2007–2009. The scarcity of credit meant that all but a few very ‘safe’ customers were able to get a mortgage. This caused a 12% decline in home prices. The decrease in demand put pressure on property prices.
In the years leading up to 2007, banks relaxed their lending standards. A third of borrowers in 2007, did not provide their bank with any proof of their income.
Things are very different today.
UK banks are well capitalised and tested against downturns in house prices. UK high street lenders are mortgage-focused businesses. They will want to make sure credit is available to those that need it in 2023 albeit at higher mortgage rates than at the start of 2022.
Higher interest rates mean banks will be more profitable. They will work with existing borrowers who face a jump in rates as they come off fixed term deals.
Financial pressure
Those who have purchased recently have done so with less leverage than pre-2009. According to the latest data from the Financial Conduct Authority (FCA), borrowers obtained mortgages at the following Loan to Values (LTV’s) since 2009:
- LTV of less than 75% – 65.66%
- LTV of greater than 75% but less than 90% – 30.96%
- LTV of greater than 90% but less than 95% – 3.01%
- LTV of greater than 95% – 0.37%
Homeowners will come under far greater pressure from higher mortgage interest rates. But 96% of loans since 2009 have been at LTV’s of less than 90%. Meaning many will have a significant amount of equity in their property.
In the UK, banks have worked with borrowers rather than foreclose on them. The FCA have already introduced plans to allow those feeling the pinch to cope. They will likely allow borrowers to switch to interest only payments on P&I loans.
Even though existing borrowers have been paying between 1% or 2%, every homeowner who had a mortgage in the previous five years had to prove they could afford a mortgage rate of 6.5% to 7%. This “affordability stress test” was to ensure that customers could afford higher rates.
The housing market has already been running in the background at mortgage rates of 6.5 to 7%. It is a major factor in the housing market’s resilience. Price increases would have been far greater if purchasers only had to prove the ability to pay at 1% or 2%.
Mortgage rates are dropping
Most people in the UK borrow with fixed-rate loans with terms of up to five years. Mortgage rates spiked immediately after the Truss governments’ mini budget. But the markets have since calmed down. The underlying cost of mortgages has returned to the level it had been earlier in 2022.
At the beginning of 2023, mortgage rates for new borrowers taking a 5-year fixed rate will be in the 4.5% to 5% range. Rates will be higher for loans with higher loan-to-value ratios.
New housing supply
The elephant in the room is new housing supply. On average, the number of new homes delivered in England between 2001 and 2022 was 185,462. The number of new homes has been increasing but not got anywhere near the estimated demand of circa. 300,000 new homes per annum.
Economic headwinds mean that developers will slash production. This will have a major impact on pricing over the medium term, particularly in London. London has higher density projects and which will become very difficult to get off the ground.
Conclusion
There will be price reductions in the short-term driven by economic headwinds. Those expecting a significant correction in pricing will not see them in the way they expect and there there will be parts of the market which will see significant declines in prices
Government intervention
Several years of quantitative easing has created low interest rates and huge asset inflation. But no one can afford for the bubble to burst. Asset growth will need to slow over time.
Neither a Conservative or Labour government (or the UK economy) could cope with a collapse in house prices. If house prices go south the government will intervene – look at what they did for covid 19. Intervention will need to focus preserving value rather than further market stimulation. Other governments have already done this. Spain has approved mortgage support for 1 million households (Nov 22).
The winners
Parts of the market will see price corrections; some will be significant. But only those with the capital available and buying power will be able to capitalise.
Market agnostic investors and those with capital will be the benefactors. But those buying for themselves will need to be flexible on where they want to live.
International investors will win from market conditions. A weak pound and better domestic economic conditions will make the UK once again an attractive investment location. Foreign investors are not impacted by section 24 if they buy in a company. If you’re thinking of investing in the UK, check out our Investor Guide to the UK, here.
The losers
The UK economy is going into a long period of low economic and low wage growth. Housing supply in the medium term will drop.
- Many people will be priced out of homeownership. They will become forever tenants. Increasing rent and less disposable income means they will never be in a position to save a deposit.
- Rental affordability will put pressure on how much tenants can afford to pay, limiting the price at which investors are willing to pay for property. Investors will buy for yield and will become price sensitive.
- The number of developers declined in the wake of the GFC. Many smaller developers will get crushed and will no longer trade.
- Contractors will go bust as new supply of housing drops. Inflexible immigration laws means the UK will not have the capacity to build and housing when the economy recovers.
- In the short term developers will change their focus. They will need pre-sales for new projects to start for high density projects. These pre-sales will come from large institutional BTR investors and small offshore investors. Housebuilders will slow production to less than current sales demand to ensure they do not have unsold housing stock.
