The UK real estate market is struggling. The years 2023 and 2024 will be difficult. Many are asking will property price drop in 2023? Here is our prediction for the UK housing market in 2023.
Will Property Price Drop?
Rising interest rates and the cost of living crisis had not affected the market for the majority of 2022. Prices kept rising while transaction volumes remained above pre-pandemic levels.
The Truss administration’s mini-budget provided the impetus for the reversal in trend. The market has since started to deteriorate.
At £296,422, the ONS average UK house price reached it’s peak in October. Prices are already falling according to indexes from Rightmove, Halifax, and Nationwide. These are leading indicators; the ONS data is around 5 months behind.
In November 2022, Zoopla reported a 28% fall in transactions agreed upon. In October, mortgage approvals fell 11% from their pre-pandemic average. Mortgage approvals reduced most in higher cost locations which are more price sensitive.
Currently, banks don’t offer an interest rate spread for different LTVs. So, the interest rate for a borrower with a 95% LTV will be the same as for a borrower with a 65% LTV.Will property price drop in 2023?
Forecasts for house prices drops range enormously. Some forecast a 2 to 3% reduction in prices, while others predict a 30%+ decline in home values.
But, a decline in house prices won’t resemble what most people expect. House prices will decline significantly in some markets. The worst affected will be those who had rapid growth outside of major centres. Due to cheap mortgage rates and a herd mentality, buyers overpaid.
But, across the board, house prices may not generally decline as much as people expect.
We might experience a stalled market. Where new supply declines and prices do not drop as much as many expect. This is why.
The Pre-Covid-19 Housing Market
Before covid-19, many predicted that the housing market would crash. Instead, it stalled. The period from December 2018 to June 2020 saw no house price growth. The number of transactions was very low. Transaction volumes in England were some of the lowest they had been since the GFC. About 30% of those deals involved new construction.
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 altered the dynamics of housing supply. The majority of developers have abandoned central CBD locations. They now favour lower density housing.
Will there be a House Price Correction?
A property market crash was forecast by many commentators before covid-19 outbreak. But there was no crash; there was nothing. The majority of homeowners did nothing. The number of transactions decreased, and people stayed put. With interest rates at historic lows, there was no need to take any action. If there is no obligation to sell your home, why would you do it for less than you believe it is worth?
For a significant price correction to take place ie. a drop in prices of say 30%, you need to assume one (or more) of the following is going to happen:
Between 300,000 and 400,000 fived rate mortgages will end every quarter in 2023. These homeowners will have to refinance at much higher interest rates. If they can’t meet the repayments they sell-at any price.
Developers sell at a loss:
In England, 30% of all sales are by developers. You must believe they will sell the properties at a loss. Construction-related cost increases and labour inflation are already putting pressure on margins.
Driven out by Section 24 and rising interest rates, landlords will sell. They’ll sell for any amount and keep the money.
All three possibilities are possible. But how likely are they to occur? It is simple to spin statistics into a story and declare property prices will plummet. But will they, though?
My House Price Forecast
There will be pressure on pricing. But the new-build market will experience the majority. And, the majority of buyers won’t be able to benefit in current market. What will occur in 2023 is as follows.
- Developers’ efforts to sell unsold units will result in a decline in the new build premium. Certain developers may need to offer discounts of up to 20% (or more). For buyers to gain, they must buy in bulk. Large investors are ready to move into this market.
- For large-scale development projects in particular, the supply of new properties will decline. Since 2009, developers have evolved. The number of new homes available could decrease by half.
- Returning to the London market in pursuit of deals are foreign investors. But with the intention of purchasing for yield as opposed to growth.
- The secondary housing market will be challenged. Prices will fall, but not by as much as some predict. Pressure will be greatest in secondary markets where people overpaid.
- There will be a reduction in home-based work throughout the year. People will return to homes closer to their workplaces. Rental demand in larger cities, where there are limited options, will increase.
Will Property Price Drop in 2023? No! This is why.
Most people are not under any pressure to do anything!
The majority of property owners will do nothing. Property owners need to be one of two things to sell during a decline in prices:
- Be financially distress and forced to sell
- Be highly driven to move. And have a new place to go.
This is already apparent given the decline in transactions since 2008. ONS sales volumes in England decreased from 1,271,033 in the year ending 2007 to 797,936 in the year ending March 2022.
In 2022, newly constructed properties made up about 30% of all sales. The secondary sales market is far less active than it has been for many years.
Financially pressured vendors
In 2023, there will be significant pressure on several types of vendor:
- Help to Buy Purchasers who overpaid for the property when they bought it. Some may experience negative equity. Most people won’t have much of a choice except to hold on. It’s likely that the government will step in to assist them. After all, they were the ones who caused the issue!
- Buy to Let Investors will be hard hit by rising interest rates and s24 requirements. That’s if they bought in their own name. Section 24 has been in existence and in place for more than 4 years. Most landlords have already sold their properties. Or they have re-geared in anticipation of the tax changes. The majority of those who have made recent purchases have done so in a company name.
- Developers have seen new sales decrease over the past three to six months. There is pressure on developers to sell. But very few developers, build at scale. The Global Financial Crisis (GFC) caused a change in the development model. Those who have properties completing in 2023 will discount to reduce risk. But they are not likely to act in this way on an individual sale basis in the retail sector. 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 will be few and far between in 2023. The pandemic made many people think twice about their situation. As a result, more people retired and left employment. For retirees, higher mortgage interest rates are less of a concern. They are more likely to have a small mortgage or to have paid it off. Retirees will downsize and move closer to friends and family. Rising living costs and the surge in energy prices will make selling more appealing. The majority of homeowners have seen notable increases in their home equity. This gives them some flexibility if they decide to move in the forthcoming year. But new buyers will be price conscious. If sellers want to sell, they must offer a discount. The vast majority of retirees will will hold off selling and will wait for more until the going gets better. For most people their home is their single largest asset.
Availability of Finance
Many people are making analogies to the Global Financial Crisis of 2007–2009. When all but a few “safe” customers were able to get a mortgage due to the lack of available credit. Home prices dropped by 12% as a result of this. Property prices were under pressure due to the decline in demand.
Banks lowered their lending requirements in the years up to 2007. In 2007, a third of borrowers gave their bank no evidence of their income.
Today, things are completely different.
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.
The profitability of banks will increase with higher interest rates. They will work with current borrowers who are about to exit fixed-term contracts and face an increase in rates.
Those who have purchased recently have done so with less leverage than pre-2009. The Financial Conduct Authority (FCA)’s most recent data show that since 2009, borrowers have secured mortgages at the following Loan to Values (LTV):
- 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%
Higher mortgage interest rates will put homeowners under far more stress. But since 2009, 96% of loans have had LTVs lower than 90%. This means many will have equity in their homes.
Instead of foreclosing on borrowers in the UK, banks have worked with them. The FCA has already unveiled initiatives to help people who are struggling to make ends meet. They’ll probably let borrowers with P&I loans move to interest-only payments.
All homeowners who agreed mortgages in the past five years have demonstrated they could afford a rate of 6.5% to 7%. This is despite borrowers actually paying between 1% and 2%. This affordability stress test ensures buyers can accord stress tests.
The affordability stress tests contribute significantly to the housing market’s resilience. If buyers had only shown their ability to pay at 1% or 2%, property price hikes would have been far higher.
Mortgage Rates are Dropping
In the UK, fixed-rate loans with terms of up to five years are the most common type of mortgage. Immediately following the Truss government’s mini budget, mortgage interest rates skyrocketed. But since then, the markets have stabilised. The underlying cost of mortgages is once again where it was earlier in 2022.
Mortgage rates for new borrowers taking a 5-year fixed rate will be in the 4.5% to 5% range at the beginning of 2023. Loans with higher loan-to-value ratios will have higher interest rates.
New housing supply
The lack of new housing stock is the big issue. Between 2001 and 2022, an average of 185,462 new dwellings were built each year in England. The number of new homes has been rising. But it is still far short of the estimated demand, which is for about 300,000 new homes annually.
Due to economic challenges, developers will reduce construction of new homes. In the medium run, this will significantly affect pricing, especially in London. London also has projects with a higher density, which will be very challenging to start.
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.
A house price would be impossible for either a Conservative or a Labour government to manage. The government will step in if housing values decline; just look at what they did for covid-19. Instead of greater market stimulation, intervention will need to be focused on value preservation. It has already been done by other governments. Spain has approved mortgage support for 1 million households (Nov 22).
Price adjustments will occur in some areas of the market; some will be large. But, only those with the necessary resources and purchasing power will be able to profit.
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 benefit. The UK will become a desirable investment destination thanks to a weak pound and improved domestic economic conditions. Section 24 does not apply to foreign investors who buy property in a company. Check out our Investor Guide to the UK here if you’re considering making an investment in the UK.
The UK economy is entering a protracted phase of slow economic growth and stagnant wages. The medium-term supply of housing will decline.
- The cost of owning property will price many out of the market. They’ll be tenants for life. They will never be able to save a deposit due to rising rent and decreased disposable income.
- Rising rents will put pressure on how much rent tenants can afford. This will restrict the price at which buyers of real estate are willing to pay. Investors will buy based on yield and become price sensitive.
- Following the GFC, fewer developers are in the industry. Many smaller developers will cease to exist.
- Contractors will fail as the supply of new homes declines. 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. This will ensure they do not have unsold housing stock.
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. There will be parts of the market which will see significant declines in prices. But, this will not be widespread.
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