From the pandemic to the cost of living crisis, Ukraine to the supply chain, rising interest rates and not to mention politics, it feels like it’s been a never ending conveyor belt of problems for buyers, sellers, landlords and renters over the past few years. Some people have benefited, others have suffered, and everyone in the middle has a lot of questions to help ensure their next move, hypothetical or not, is the right one.
To try and unpack what’s happened so far and what might happen later in 2023, we’ll break things down into three distinct areas - Prime London, London and the rest of the country. The macro trends, movements and causes are broadly the same, but there are still stark differences in price and demand depending on the area of the country. But regardless of where you live, and what your plans are for the rest of the year, one of the biggest questions on everyone’s lips is, will there be a housing crash at some point in 2023?
“The average property price in the UK fell by 2.3% in November 2022”
Last year, in the last month of 2022, the Bank of England further increased interest rates to a 14-year high of 3.5%. Then in February they raised it again for the tenth consecutive time to 4%. This is having a material effect on the housing market, with higher mortgage prices affecting people including prospective buyers and those on fixed rate mortgages that will be looking to remortgage this year. These additional outgoings combined with the cost of living crisis will put a lot of people’s plans on hold, whether they’re first time buyers or looking to move up the ladder. And these new challenges are already having an effect on prices. The average property price in the UK fell by 2.3% in November, which was the largest drop since October 2008 or to put it another way, in the last 14 years! Meanwhile, annual house price growth also slowed from 8.2% to 4.7% in November. This led Halifax to predict a 8% decline in house prices in 2023.
These changes trending down continue when we look at the numbers for mortgage approvals. In the wake of former chancellor Kwasi Kwarteng’s disastrous mini budget, approvals for purchases fell from 65,967 in September 22 to 58,977 in October, the lowest level since June 2020, according to the Bank of England.
Meanwhile, further Bank of England data estimates more than two million borrowers with fixed-term deals will need to remortgage between now and the end of 2024. The Week reports that analysts at Pantheon Economics calculated an average household refinancing a two-year fixed-rate mortgage in the first half this year would see monthly repayments jump from £863 to £1,490.
But despite these figures, going into the new year, January has – for the moment – bucked a lot of predictions and doom mongering headlines with a stronger than usual bounce. At the start of the year many pundits had predicted a price crash or at least a significant softening in 2023, though it appears now it is more difficult to see how things will play out. Rightmove’s January house price index reports that after two months of falls, the average asking prices have risen again by 0.9% (+£3,301), which is the biggest increase at this time of year since 2020, taking the national average from £359,137 to £362,438.
However, this is tempered by average asking prices sitting at £8,720 lower than their peak in October. But other positives include the number of prospective buyers contacting agents rising to 4% compared to the same period in 2019. On top of that, the 5th of January was the third busiest day ever for people contacting agents to arrange valuations. And there were even green shoots of hope in the mortgage market, with rates softening and even some sub 5% deals coming to market, which will be hugely reassuring for the first time buyer market. Tim Bannister, Rightmove’s Director of Property Science says in the report, “The seasonal increase in new seller asking prices this January from December is particularly encouraging for movers who are looking for the reassurance of familiar trends and a calmer, more measured market after the rapidly changing and at times chaotic economic climate of the final few months of last year. However, while average asking prices did rise in January, they are still £8,720 less than their peak in October.
The early-bird sellers who are already on the market and have priced correctly are likely to reap the benefits of the bounce in buyer activity, while over-valuing sellers may get caught out as property stock builds over the next few weeks and months, and they experience more competition from other better-priced sellers in their area. It will be important for the vast majority of sellers to remember that a drop in your asking price is likely not an actual loss compared with what you paid for it, only a failure to live up to aspirations.” This information should be heeded by any would be sellers. The market, like a large river, though it may be moving generally in the same direction there are often small eddies and back-currents that can affect your property price. From locality, to the exact competing properties at the time of listing. Listen to your agents advice, especially when it comes to selling in a hyper-local market. Price right the first time and save yourself the need to make potential reductions down the line. There is no worse pricing strategy than following the market down.
CAPITAL IN THE CAPITAL
While some broad strokes trends will be the same wherever you are in the country, London has, and always will move to its own rhythm, and this is no different when it comes to property. According to the latest Prime Central London Buyer Demand Index by Benham and Reeves, demand is down across the prime London market (£2m-£10m) both on a quarterly and annual basis, but the super-prime threshold of £10m+ saw an increase in buyer demand in the fourth quarter of 2022.
This last point is likely the result of London being a relatively ‘cheap’ option compared to other prime central urban areas around the world as well as the weak pound. Moving away from central, the capital’s core prime market saw a decline in buyer demand in the fourth quarter of this year, falling by -4.1% to 21.4%, marking an annual decline of -5.7% since this time last year. Chiswick (51.7%), Wimbledon (44.9%) and Islington (38%) are home to the current highest demand for prime properties. Meanwhile, the largest quarterly decline in demand for prime London property was in Barnes where demand dropped by -29.7% in the last quarter of 2022, followed by Wandsworth (-26.7%), Canary Wharf (-13.1%), Highgate (-11%), and Clapham (-8.6%). And while the race for space that hit the market during and after the main period of the pandemic may have started to subside, buyers with clear ideas of what they want and where they want to live are still moving with intent.
“The heavily reported urban exodus to the countryside and coast appears to have slowed down and even reversed in some cases.”
COUNTRY LIVING
Outside the capital, things are changing too. The heavily reported urban exodus to the countryside and coast appears to have slowed down and even reversed in some cases. The working from home trend that saw many commuters extend the boundaries of their search seems to be in the process of reversing. There is currently a “slow but sustained return to the workplace” according to Laura Landells at Remit. This could ultimately lead to some recent purchases being re-assesed once the drag of commuting is re-instated. Meanwhile Rightmove reports that coastal towns in the south of England, Lake District and mid-Wales all recorded a greater slowdown in demand and sales over 2022 than other areas. The report points to the initial wave of people looking to work from home, gain more family space and retirements has run its course for the moment.
So 2023 may well see a relative boom for urban areas. According to Rightmove, Bradford, Swindon, Coventry, Crewe, Milton Keynes and Southend are all registering above-average demand. All of the above have their own employment options, but crucially they boast good connections to much larger cities like London, Leeds, Manchester and Birmingham. Which combined with many white collar workers having the option to work from home for at least part of the week, makes them appealing options.
“Rental property, as an investment is no longer perceived to be such a great place.”
STRUGGLES WITH RENTALS
Unfortunately, while there are some signs of positivity in the rest of the market, the rental market continues to suffer. In London, the situation is particularly acute. In October 2022, data from SpareRoom, showed the number of renters looking for rooms in the capital had tripled since the start of 2021. Yolande Barnes, chair of University College London’s Bartlett Real Estate Institute, told Bloomberg that the spike was largely due to the end of furlough, easing of restrictions and the young professional class returning to the city.
“The archetypal young professional, who worked at home from their parents’ place and saved money on rent, is now going back to living in real places,” said Barnes. The problem is, there simply isn’t enough property, which results in seven times the amount of people looking than there are rooms available. Why has this happened? Largely it’s due to private landlords leaving the market either because they’re making a loss or fear a loss as mortgage rates continue to rise. And those that do stay in the market are increasing rents, with Foxtons reporting average London residential rents climbed steadily throughout 2022 and finished the year 20% higher than at the end of 2021. Demand has further increased due the rise in mortgage costs stopping many would-be first time buyers from moving up and making space in the rental market.
“The archetypal young professional, who worked at home from their parents’ place and saved money on rent, is now going back to living in real places.”
A combination of a mass return to the city, poor government legislation, and some bad actors in the landlord community have effectively removed the first rung of the property ladder. A recent open letter to Michael Gove, from signatories including members of the National Residential Landlords Association and The Lettings Industry, says plainly, ‘property portal data shows that supply is down 46% compared with the five year average.’ The letter goes on to say, ‘rent increases restrict mobility and supply, with tenants frightened to move house for fear of facing even higher rents in a new home.
By failing to encourage adequate supply, government policy is directly contributing to the sharp increases in rental prices.’ The fact it seems is that rental property as an investment is no longer perceived to be such a great place. It can be a hassle, plus it ties up large sums of capital, mortgage rates are higher and legislation removes the ability to offset some of these finance costs from taxable profit. Instead it seems that many new would-be landlords have simply not entered the market over the last few years - resulting in a tightening of supply. Many see the housing market in general to be over-bought, and small private landlords used to assume that the capital increase in their property would be a hedge against their rental yields. For the time being it seems they are putting their money elsewhere.
So it goes that the property market is treading what could be described as a fine line. Although a full blown crash seems to be off the cards, for the time being at least. There are many powerful forces at work that could push sentiment firmly one way or the other.
