After months of political upheaval, the landscape has calmed in recent weeks, providing a greater sense of stability in markets than at any time since mid-September.
But as we survey the outlook for the housing market, there is no getting around the economic and financial challenges that lie ahead.
Challenging landscape ahead for households and the wider economy, but a brighter outlook than late September
Average house prices will decline (from current near-record highs) in 2023, falling by 8% during the year, and by 2% in 2024
In prime London, prices will decline, but by a more modest margin of 4% before stabilising in 2024
The rental market will remain strong over the next 12-18 months as demand continues to outpace supply, although rental growth will fall back from current double-digit levels. We forecast a 5% rise in prime London rents in 2023
The UK is facing record-high inflation, after demand flooded back after Covid putting pressure on disrupted supply chains. The Russian invasion of Ukraine then created an energy price shock, which is still having ramifications for businesses and households. The Bank of England has raised the base rate from 0.1% to 3% in a matter of months, with more rises to come. The country is now in recession and GDP is set to continue shrinking for the whole of 2023 at least, according to the Office for Budget Responsibility (OBR). At the same time unemployment levels, which have been relatively low in recent years, are set to rise.
As a result of these factors, households are facing higher energy bills, and household bills, just as mortgage rates are rising, putting more pressure on homebuyers and homeowners.
This combination of factors will put downward pressure on house prices, but they come just as the housing market has experienced two of the strongest years on record in terms of prices and activity. Many towns and cities across the country have seen double-digit price growth in the last two years as demand soared after the first Covid lockdown.
The average value of a UK home has risen by 22%, or £48,000 since early 2020, according to data from Nationwide, due to high levels of activity spurred by the pandemic, with households reassessing how, and where, they were living.
In the North West, average house prices in Q3 were 27% higher than Q1 2020, a £45,000 rise, while in Greater London, prices are up £75,000, or 16%.
There is evidence that re-pricing has already started, with a slowdown in annual price growth from 7.4% in October to 4.4% in November. This will continue through 2023 and into 2024 in the sales market given the changing economic conditions, but even so, values are likely to remain higher than they were pre-Covid.
Another factor supporting the market is the stress testing that buyers have undergone to obtain a mortgage since 2014. These tests ensured that if their household income remained the same, they could afford higher mortgage rates. This means the market is much more protected than in the wake of previous economic shocks such as the global financial crisis. The banks are well-funded, and so loans are available, albeit at a higher rate, keeping the wheels of the market oiled.
Recent signals from the Bank of England and the OBR also point to the fact that base rates may not rise as high as anticipated several months ago. The outlook now is for base rates to peak at 4% or 4.5% next year. Mortgage rates are already falling back, with some fixed-rate deals under 5% hitting the market, and this is a trend that may continue into next year as lenders secure cheaper funding and then compete for business.
UK house price change
Prime London sales price change
Prime London rental value change
Source: Cluttons, Experian
Prime London sales
The prime London sales market lagged other markets during Covid, with the lack of international travel affecting international demand, and the trend for moving to prime rural markets impacting activity. As a result, there is less of a price rebalancing to come.
Buyer demand is coming back to city locations, with some buyers seeing value – particularly for flats which have underperformed houses in terms of price growth. International demand is not back to pre-Covid levels, but the weaker pound is also offering value for those active in this market. We forecast a 4% price fall as this market is more sheltered from some of the factors spurring the declines expected in the wider UK mainstream market.
Prime London rental
The rental market moved into sixth gear in Autumn last year as demand flooded back into city centre markets after Covid, far outstripping supply. The changes to legislation which make it increasingly challenging for smaller landlords mean that supply could remain constrained as some landlords consider selling, shrinking the stock of rental properties. Meanwhile, the changing mortgage and house price picture will mean more would-be buyers may be in this sector for longer, further expanding demand. We expect solid rental growth next year, but expect rental rises to recede from double digits, to around 5% next year in the prime London market.