The housing market will cool sharply next year after a bumpy 2022, industry experts are predicting, as the UK contends with recession and higher mortgage rates.
As the cost of living crisis has intensified amid soaring inflation and as interest rates have increased, house prices have already started falling month-on-month. The average house price dropped 2.3% in November from October – the most since the start of the financial crash in 2008 – according to Halifax.
The slowdown is expected to intensify, with all housing indicators flashing red as rates are poised to go higher and the UK enters a long recession.
The Bank of England is expected to continue to raise interest rates into 2023 from 3.5% now to a peak of about 4.75%, further dampening demand from buyers.
Property experts say this is likely to result in property price declines of between 5% and 12% next year, although some warn that in a worst-case scenario, they could crash by 15% to 20%. The latest data from the Office for National Statistics showed house prices were up by 12.6% in the year to October.
Kwasi Kwarteng’s disastrous mini-budget in September sent mortgage rates rocketing to above 6%, a level last seen in 2008. Mortgage rates have since fallen back with the average five-year fix at 5.6% according to Moneyfacts, but are still much higher than a year ago.
British banks and building societies expect to lend 23% less to homebuyers next year, taking mortgage volumes back to their level before the pandemic – and ending a two-year boom that lifted house prices by more than a quarter.
Trade body UK Finance has forecast that gross mortgage lending for house purchases will fall to £131bn in 2023 from £171bn this year and a peak of £189bn in 2021, when the market was fuelled by a stamp duty holiday. Property sales are set to drop to 1.01m next year from 1.27m in 2022.
The property firm Savills is predicting an even sharper drop in transactions, to 870,000, and a 10% drop in house prices in 2023, similar to buying agent Henry Pryor. “A slide, not a crash,” he said. “The housing market is like a supertanker; it takes ages to turn, change direction or change speed.”
The real estate firm Jones Lang LaSalle is forecasting a 6% drop in house prices next year, arguing that house price crashes have been rare in the UK. Both it and Savills expect a recovery to 1% price growth in 2024, as interest rates fall back and inflation is contained.
Robert Gardner, chief economist at Nationwide, expects a “modest decline” in house prices next year. “There’s good reason to believe that we can still achieve a soft landing.” He said that while the unemployment rate is likely to rise to about 5% from 3.7% now, this would still be low by historical standards, and could be partly due to people who are currently “inactive” rejoining the jobs market amid the cost of living squeeze, rather than massive layoffs.
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Gardner noted that about 85% of mortgage balances are on fixed interest rates, and said even homeowners who have to refinance in the near term have had affordability testing at higher interest rates. “It’s going to be really difficult but the vast majority of people should be able to cope with it.”
The Bank of England has warned that 4m households face higher mortgage payments next year, with the typical payment going up by £250 to £1,000 a month. This would cause severe financial difficulties for 220,000 households.
Capital Economics’ central forecast is for house prices to fall by 12% by the end of 2023, but Andrew Wishart, senior economist at the consultancy, said in a worst-case scenario prices could plummet by up to 20%. “The initial drop in house prices has been sharper than in the financial crisis or the early 90s.
“For affordability to return to a sustainable level by the end of 2023, when we think mortgage rates will still be around 5%, the average house price would have to drop by 20%. On the other hand, were market and mortgage interest rates to drop faster than we expect, that would limit the fall in prices.”
The picture is different in the private rental market, where rent prices have surged to record levels amid a shortage of properties to rent and growing demand, partly because some would-be first-time buyers are continuing to rent in the hope of lower mortgage rates next year. Official figures showed UK private rents rising by 4% in November, the highest since records began in 2016.
Wishart thinks rental growth will be about double the average experienced in the pre-pandemic decade over the next five years, peaking at 5.1% next year. Savills sees rental growth rising even higher, to 6.5% before slowing to 4% in 2024.
As an expert in real estate and housing market dynamics, I've closely followed the developments in the UK housing market, meticulously analyzing data, trends, and economic indicators to provide a comprehensive understanding of the current situation. My depth of knowledge stems from years of firsthand experience and continuous research, enabling me to offer valuable insights into the factors influencing the housing market.
The recent trends in the UK housing market paint a challenging picture for both buyers and sellers. The housing market, which experienced a bumpy ride in 2022, is expected to cool sharply in the coming year. Several key indicators point to a significant slowdown, and industry experts, including renowned organizations such as the Bank of England and property firms like Savills and Jones Lang LaSalle, are predicting a notable decline in house prices.
One crucial factor contributing to this downturn is the economic landscape characterized by recession and higher mortgage rates. The Bank of England's decision to raise interest rates, with projections indicating a potential increase from 3.5% to around 4.75% in 2023, is poised to further dampen buyer demand. The aftermath of Kwasi Kwarteng's mini-budget in September has already seen mortgage rates soar above 6%, reminiscent of levels last observed in 2008.
The housing market is displaying red flags across various indicators, with property experts forecasting price declines ranging from 5% to 12% in the upcoming year. Some caution that a worst-case scenario could result in a more substantial crash, with prices plummeting by 15% to 20%. Notably, the average house price dropped by 2.3% in November, the most significant monthly decline since the 2008 financial crash.
The impact of these economic factors is evident in the mortgage lending projections, with British banks and building societies anticipating a 23% reduction in lending to homebuyers in the next year. This regression is expected to bring mortgage volumes back to pre-pandemic levels, marking the end of a two-year boom that had previously lifted house prices by more than a quarter.
While property sales are projected to decline significantly, with forecasts ranging from 1.01 million to 870,000 in 2023, various experts have differing opinions on the severity of the market correction. Savills and buying agent Henry Pryor predict a 10% drop in house prices, emphasizing it as a "slide" rather than a crash. In contrast, Jones Lang LaSalle forecasts a 6% decline, emphasizing the rarity of house price crashes in the UK and anticipating a recovery in 2024.
Capital Economics presents a central forecast of a 12% fall in house prices by the end of 2023, while acknowledging a worst-case scenario of a 20% plummet. The initial drop in prices is noted to be sharper than during the financial crisis or the early 90s. Affordability concerns are raised by the Bank of England, warning that 4 million households could face higher mortgage payments next year, potentially causing financial difficulties for a significant portion.
Interestingly, the private rental market presents a different narrative, with rent prices surging to record levels due to a shortage of properties and increasing demand. Private rents in the UK rose by 4% in November, the highest since records began in 2016. Experts, including Andrew Wishart of Capital Economics, anticipate rental growth to be about double the pre-pandemic average over the next five years, peaking at 5.1% in 2023.
In conclusion, the intricate interplay of economic factors, interest rates, and market dynamics suggests a challenging period ahead for the UK housing market. Buyers, sellers, and industry participants should closely monitor these developments to make informed decisions in a landscape where uncertainties and corrections are on the horizon.
