What future for the UK property sector – we need a crystal ball?

UK Property Sector

I guess the real question is, where do we start?

There are so many influences and interconnected factors impacting the UK property sector at the moment, it’s impossible to look at any of them in isolation, and equally as impossible to fully understand how one will impact another.

As we said in our introduction, a crystal ball would be very useful right now!

What do the statistics say?

According to Nationwide statistics, UK house prices rose at a double-digit rate for the 10th consecutive month in August, as a lack of supply supported valuations, despite mortgage rates increasing and an intensifying cost of living crisis.

But how long can this continue and is a major re-alignment of prices on the horizon?

Nationwide’s Chief Economist, Robert Gardner commented that the slow down had been “modest” and that price growth had continued primarily due to a shortage of stock in the market.

The question remains, is this sustainable and, with mortgage rates rising fast could a crash in prices be on the cards?

The Bank of England are suggesting the UK will officially enter recession from next month and that it will remain so until the end of 2023.

This will undoubtedly have an impact on consumer confidence and combined with the cost-of-living increases, will inevitably slow demand.

However, demand currently is outstripping supply and it’s this lack of available stock which is maintaining average prices at the level they are now. It’s still not uncommon for estate agents to have lists of buyers waiting to buy, so stock often never hits the market.

UK Consumer Spending

The squeeze on consumer spending, the rise in the cost of living and the rise in underlying inflation will all slow the market. Buyers will inevitably at some point decide that the time is not right to buy and when that happens, prices will stabilise and drop, not necessarily across the country, but certainly in most regions.

The end of the year seems to be the time when most of the issues we are facing will crystallise and the market may see that re-alignment. Energy bills are set to rise by 80% from October, inflation is running at a 40 year high and interest rates are on a steady rise and are set to continue doing so. By the year end households will really be seeing the impact of all these factors and, at that stage, the bubble may deflate slightly, but we don’t predict this necessarily means it will burst!

There are many factors influencing the housing sector. It’s true that prices are driven by demand and people’s ability to borrow and afford to move. This is also influenced by market conditions and the economic outlook. It is also true that the current picture does not look rosy, but it could equally change quite quickly with a change in the geopolitical landscape, events in Ukraine, a slowdown in inflation and the population’s “attitude of mind” can all change direction.

So, let’s not talk ourselves into a crash that may be avoidable.

For landlords the thought of a housing price crash is never ideal, especially when in recent times they have seen rising yields as demand for rental property has risen whilst stock remained thin on the ground and rents have been increasing significantly.

A recession brings with it the risk of rising unemployment and tenants’ inability to meet rent repayments. With climbing mortgage payments and the reduction in earning due to recent tax law changes, this is a scenario many landlords would want to avoid.

Having said that a recession and drop in prices is not always bad news when shrewd investors can use the drop to restructure and develop their portfolios.

So where does all this leave us?

Some analysts are predicting a 7 – 10% drop over the next two years, wiping out the growth seen in the boom period post pandemic. Base rates are predicted to be knocking on the door of 4% by Spring 2023, leading to a drop in demand.

However, falling prices are good for first time buyers and landlords looking to grow their portfolios, so not all negative news.

The scale of any property market re-alignment will be dependent upon the path of interest rates and the pace of inflation, we are anticipating property prices will fall 5-7.5%. However, the noted fall from asking prices could be as much as 15%, as selling prices are typically already lower than asking prices.

Only time will tell. With the path of property prices dependent on so many external factors, due consideration using a crystal ball may be the best answer!