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UK Property Market Predictions

Making any predictions or observations about the next 12 months is always steeped with challenges, and never more so than if you are commentating on the UK property sector.

So, let’s start with the easy bit, 2022, its highs and lows and what have we learnt from it.

In a year that was nothing less than turbulent, and ended with a mini budget that nearly broke the financial markets, what are some of the standout factors?

At the end of Dec’22 Reuters reported that UK house prices ended 2022 on a weaker note following the pandemic boom. December results had shown another slowdown as the increasing cost of mortgages reversed some of the growth seen during the covid period.

Nationwide reported the fourth consecutive fall in prices which, it argued, will not see a slow down until the pressure on household finances starts to ease. The fall in prices across October and November was the largest since Oct’20 and signifies an acknowledgement within the market of repricing.

Added to this, according to Zoopla we saw a 12.1% rise in rents to Oct’22 across the UK, with the lack of rental stock continuing to have an impact on rising rental costs.

Finally, Bloomberg reported the number of first-time buyers fell by 9% in 2022, not surprising when you consider the rising costs of UK properties, mortgages and the cost-of-living squeeze. What is surprising is that first-time-buyers still accounted for over 53% of mortgaged property purchases.

What’s the outlook for 2023?

It’s a brave person that tries to predict the forward activity of the UK property sector, especially after the turmoil of the last year.

It is true that in late Nov/early Dec, property forecasters were predicting significant drops in UK prices, fuelled mainly by the uncertain domestic economic environment, higher mortgage costs and the issues across Europe.

However, there are some positive and encouraging signs that 2023 may not be the year of further gloom and despondency that was being talked about just over a month ago….

Nationwide Chief Economist, Robert Gardner commented on how the market could pick up:

"Longer-term interest rates, which underpin mortgage pricing, have returned towards the levels prevailing before the mini-Budget. If sustained, this should feed through to mortgage rates and help improve the affordability position for potential buyers.".

I can understand his theory but, early indications are that whilst the markets have settled, mortgage rates are taking longer to “normalise” and I believe that growth is likely to be slower in coming.

The threat to this potential upturn will be the continued economic pressures, further falls in real term earnings and a weakened economy.

There are some early indications that a degree of normalisation is returning to the commodities markets which will, in turn, filter through to the High Street.

UK gas prices have fallen 50% at the time of writing and lumber prices have fallen over 67% year on year as of last week. Only time will tell if these improvements make a material and lasting change to consumer confidence and the economic landscape.

If the BoE votes to continue increasing leading rates (which they are widely predicted to do), then further pressure will be placed on the market and growth will slow as demand reduces.

Current thinking puts a cap on base rate at 4.25% to 4.5%, which I would agree with. Any increase beyond this allied to the ability for existing homeowners to meet repayments and renew on fixed rates, would present issues in the economy and fuel further house price falls.

Early indications led many to believe that a drop of 15% to 20% was on the cards, this now looks unlikely with property experts discussing declines of 5% to 10% over the year. My own view is that property prices will fall 10% from their peak in 2022.

What do the experts say?

The Halifax predicted an 8% fall over the year, which according to Halifax Homes Director Andrew Asaam:

Places the average property price back at roughly the level it was in April 2021, reversing only some of the gains made during the Pandemic.”

Although the UK labour market remains very tight and with a relatively low level of unemployment, many property industry bodies are predicting a reduction in the number of housing transactions this year. UK Finance has forecast that gross mortgage lending will reduce from £171bn in 2022 to £131bn in 2023.

In the BTL market there are further challenges over and above the lack of supply.

Alternative investments such as quality corporate debt, bond yields and even some fixed term savings products offering yields of over 5% are deemed more attractive. Added to this the timeframe of disposing of property stock makes BTL less attractive in the short term.

In conclusion, we all know that markets can react quickly, decisions made in one economic environment can have lasting and material effects on economies around the world and, like ripples in a pond, continue to impact long after the initial activity.

Early indications are that UK base rate increases will not be as high as anticipated, the drop in house prices will be lower than expected and demand will reduce, but not by as much as first thought back in September 22..

But, all these factors are massively influenced and interlinked with both the UK and World economies. Stability is key in both and any unpredicted changes have an impact on the equilibrium of the UK property sector.

Let’s hope that the next quarter sees stability in all those markets and delivers a platform for sustainable growth return.

Published on 20th January 2023

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