Market Comment | October 2023

We’re over half way through 2023 and the UK housing market continues to generate headlines. Some good, some bad, all interesting. So whether you’re looking to buy or sell, stay put, or move up the ladder, let's try to unpack what’s been going on and think about some possible directions the market may take in the future.

According to Nationwide’s June house price index, prices across the UK remained broadly flat over the month, but were down 3.5% compared with June 2022. Commenting on the figures, Robert Gardner, Nationwide's Chief Economist, said, “annual house price growth was broadly stable at -3.5% in June, little changed from the 3.4% decline recorded in May. Prices were also fairly stable over the month, rising by a modest 0.1%, after taking account of seasonal effects, reversing the 0.1% decline seen in May.

Annual house price growth was broadly stable at -3.5% in June, little changed from the 3.4% decline recorded in May.

Longer term interest rates, which underpin mortgage pricing, have increased sharply in recent months, in response to data indicating that underlying inflation in the UK economy is not moderating as fast as expected. This has prompted investors to expect the Bank of England to increase its policy rate further and for it to remain higher for longer. Longer term borrowing costs have risen to levels similar to those prevailing in the wake of the mini- Budget last year, but this has yet to have the same negative impact on sentiment. For example, the number of mortgage applications has not yet declined and indicators of consumer confidence have continued to improve, though they remain below long run averages.”

As mentioned above, the fallout from last September’s mini-budget continues to be one of the drivers of climbing interest rates. The significant increase in borrowing costs is expected to have a major impact on housing market activity in the near future. For instance, if we consider a typical first-time buyer who earns the average wage and intends to purchase a standard property with a 20% deposit, their mortgage payments as a percentage of their take-home pay are now well above the long-term average. Additionally, housing prices remain elevated compared to earnings, making it challenging for aspiring homeowners to meet the deposit requirements, which still serve as a significant barrier to market entry. For example, a 10% deposit on a typical first-time buyer home currently amounts to approximately 55% of their gross annual income. While this is lower than the record highs of 59% observed in late 2022, it is still slightly higher than the levels seen before the onset of the financial crisis in 2007/2008. Furthermore, despite the availability of higher interest rates for savers, the sharp increase in rental costs, coupled with persistently high inflation rates, continues to hinder the ability of many prospective buyers to save enough for a deposit.

According to the Zoopla House Price Index for May 2023, the number of newly agreed sales in the previous four weeks exceeded the five-year average for the same period by 11%.

According to the Zoopla House Price Index for May 2023, the number of newly agreed sales in the previous four weeks exceeded the five-year average for the same period by 11%. This increase in sales contributed to a higher inventory of homes available for purchase since many buyers were simultaneously selling their own properties. In fact, the influx of homes entering the market is up by 16% compared to the five-year average. But it is still important for sellers to maintain a realistic approach to pricing in order to attract potential buyers who are genuinely interested in making a purchase. In May, 18% of the homes listed on Zoopla for sale had a price reduction of 5% or more. However, it is worth noting that this figure has decreased from 28% observed in February. Typically, sellers opt to reduce prices approximately eight weeks after their initial listing, as they aim to generate greater interest from prospective buyers.

... current trends suggest that our original forecast of a 2% annual drop in asking prices at the end of 2023 is still valid.

Further analysis from Right Move in the property portal’s June House Price Index shows the traditional summer lull is in place, and also illustrates the importance of seller pricing their property competitively, with many people still ignoring trends. Tim Bannister, Rightmove's Director of Property Science said in the index, “Average new seller asking prices, the first and leading indicator of new trends in the market, have dropped slightly this month, signalling that the belated spring price bounce has quickly turned into an earlier than usual summer slowdown. We expect asking prices to edge down during the second half of the year which is the normal seasonal pattern, and while we sometimes re-forecast our expectations for annual price changes at this time, current trends suggest that our original forecast of a 2% annual drop in asking prices at the end of 2023 is still valid. Agents report that new sellers are sitting in two camps – those who still have overoptimistic price expectations following the buoyant pandemic market, and those who have adapted to the new conditions and are coming to market with a competitive price. Sellers who price competitively are much more likely to find a suitable buyer quickly before their home appears stale, and they can often then negotiate on price on any onward purchase.”

Sellers who price competitively are much more likely to find a suitable buyer quickly before their home appears stale, and they can often then negotiate on price on any onward purchase.

So as we look to the second half of 2023, it seems increasingly likely that further interest rate hikes will be the driving and defining factor for the property market. Money Week recently reported that some analysts and markets are predicting rates could peak at as much as 6.25% by the end of the year, a very different proposition to chancellor Jeremey Hunt, who said in the Spring Budget, that the Office for Budget Responsibility (OBR) expects inflation to fall to 2.9% by the end of the year. And with many people looking for new mortgage deals, or waiting for their locked in, but higher rates to start, it’s yet to be seen how that will affect the wider property market.

To read the rest of our Q4/23 Magazine, swing by our office to pick up your copy! Or check out the link below:

https://issuu.com/briklondon/docs/brik_magazine_-_2023_-_q3?fr=xKAE9_zU1NQ

Illustrations © Anna Obarzanska.