With some mortgage rates reaching a high as 6.5% in 2022, there were many predictions of house prices falling in 2023, however the demand remains strong for many properties throughout the UK.
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Banks will be keen to make mortgages available in 2023 and are coming up with options to make sure customers can afford the jump in mortgage rates
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The recent fiscal plan from the government has calmed money markets again and we expect 5-year fixed rate mortgages will be in the 4.5% to 5% range in the new year
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The impacts of the pandemic continue to shape the desire to move home and will help support 1 million home moves in 2023
Cost of living pressures and higher mortgage rates have dented interest from new homebuyers in the second half of 2022.
The spike in mortgage rates to 6.5% after the mini budget caused widespread alarm, given mortgage rates were just 2% at the start of 2022. Housing market activity has stalled since October as buyers and sellers stand back and wait to see what the outlook is like in January 2023.
Many forecasters have put out bearish predictions for 2023, anticipating house prices falls of 8% to 12% and a significant fallback in sales numbers. Most of these projections are based on expectations of high mortgage rates over 2023 and an economic recession lasting into 2024.
While the outlook is less certain and more challenging for a growing number of households, we are more positive about the prospects for house prices and sales volumes in 2023 for 3 broad reasons.
Banks are keen and ready to lend
Many people are looking back at history to draw parallels, in particular the 2007-09 downturn. The 12% drop in house prices over this period was driven by a lack of credit, in that few banks were willing to lend to anyone but the safest customers. This reduced demand for homes and prices fell.
Price falls were also amplified by banks loosening their lending criteria in the run-up to 2007. A third of borrowers didn’t prove their income to their bank in 2007 when applying for a mortgage.
Things are very different today.
UK banks are very well capitalised and their business plans are subjected to regular testing against major downturns in house prices and economic growth. All our high street lenders are mortgage-focused businesses and they will want to make sure credit is available to those that need it in 2023, albeit with higher mortgage rates than at the start of 2022.
Higher interest rates means banks will become more profitable. For existing borrowers, banks are developing a range of options to make sure customers can afford the jump in mortgage rates as they come to the end of fixed term deals.
Mortgage rates are dropping
The other big change in recent weeks has been a fall in the cost of money that underpins mortgage rates.
The vast majority of us take fixed rate loans of up to 5 years. After the fallout from the mini budget, the recent fiscal plan from the government has calmed money markets again. This has seen the underlying cost of mortgages fall back to where it was starting to move to earlier in the year.
This means typical mortgage rates for new borrowers taking a 5-year fixed rate will be in the 4.5% to 5% range at the start of 2023.
Higher loan-to-value mortgages will see the higher mortgage rates while those with the biggest deposits, or the most equity in their home, will get the best rates. This factors in further modest increases in the Bank of England base rate in the short term to bring down inflation.
The other important thing to note about mortgage costs is that every homeowner who took out a mortgage over the last 5 years had to prove to their bank they could afford a 6.5% to 7% mortgage rate, even though they may have been paying just 1% or 2%. This so-called affordability stress test was designed to to make sure buyers could afford higher rates.
This is important, and means the housing market has effectively been operating in the background at 6.5% to 7% mortgage rates. It is another key reason we see evidence of underlying resilience in the housing market. If everyone had been buying based on whether they could afford 2% mortgage rates, house price growth would’ve been much higher and we would now be expecting much bigger price falls as a result.
Motivations to move home remain
The impacts of the pandemic continue to shape the desire to move home. People who expect to work more flexibly are 6 times more likely to move than those that don’t expect any change in their working style. The proposals from the government to make flexible working more open to employees will support this trend and further loosen the ties between where people live and work.
The pandemic also brought on a jump in the number of people leaving the labour market for health reasons and retirement, which are big triggers for home moves. Those retiring are more likely to have paid off their mortgage or have a small mortgage, so higher mortgage rates are less of a concern – 30% of sales involve no mortgage at all. Many will be looking to move closer to friends and family or to a better area and a smaller home through down-trading.
The jump in energy costs alongside the general increase in living costs are likely to be compounding the drivers to move. This is particularly the case for those concerned about running costs and the suitability of their current home to meet their future needs.
We expect all of these factors to support home moves in 2023, creating demand for homes listed for sale in the new year. We predict there will be 1 million home sales in 2023, which is down 20% on 2022 levels. New buyers will continue to be price sensitive but many sellers have made sizeable gains in their housing equity, giving them some room for movement if they want to move in the year ahead.
First time buyers are looking to more affordable areas of the UK, where prices are not driven as high by higher demand. A slower housing market could benefit many first time buyers.
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Flats are offering the best value for money for 20 years across most of the UK
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Sellers are already giving 4% discounts on average and they’ll be even more open to negotiations in 2023
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House prices will start to drop in the new year, with the most expensive areas seeing the biggest price falls
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Many urban areas are still affordable despite high demand, including Bradford, Swindon, Coventry, Crewe, Milton Keynes and Southend.
Low mortgage rates have meant first time buyers could often afford a three bedroom semi with a double driveway and a big garden over the past 2 years.
However with more expensive mortgage rates and higher living costs, you might be wondering about your chances of stepping onto the property ladder in 2023.
Many buyers have been stepping back from the market, with demand down 50% against this time last year.
A slower housing market can bring opportunities for first time buyers. If you know where to look and when to make your move.
Look to flats for better value for money
Price growth for flats has been much slower than for houses in the last 10 years. This means a flat could give you the chance to buy at a cheaper price for greater value for money.
After the pandemic, there was a rush towards houses as everyone wanted more space. Demand for flats dropped and values rose at a slower rate than house values.
In London, you’ll spend 1.7 times more on a house than you will on a flat. 10 years ago, a London house was only 1.4 times more expensive.
It’s a similar picture across the rest of the UK, where you’ll pay 2.1 times more for a house than a flat – the highest differential in 20 years.
See what is available within your budget.
If you want to save money by buying a flat, make sure you’re aware of the extra costs and considerations. Service Charge, Ground Rent and Lease Renewals being some of the most common additional costs.
Check if the property is for sale as freehold or leasehold, find out the cost of service charges and ground rent, and make sure it’s clear who will pay for repairs and maintenance to the building.
We expect more buyers to realise the relative value to be found in flats in the coming months, which will increase demand for flats later in 2023. This will also be supported by the government’s commitment to fix cladding issues, which impact a small proportion of flats in the UK.
Put in an offer: sellers will be more open to negotiations in 2023
Sellers are now accepting offers 4% below asking price on average, which works out to a £10,500 discount on the average home right now.
It’s already a big change from a few months ago; in October, buyers were not getting any wriggle room from sellers and we recorded an average discount of 0%.
Should this trend continue you may be able to get a greater discount from sellers in 2023.
If you’re looking to buy soon, keep in mind that December is not usually the best month for discounts or reductions to asking prices.
It is often worth putting an offer in the New Year instead, as sellers often wait to see if new buyers will come into the market the first week of January.
Keep an eye out for small drops in house prices
While house prices are up 7.2% over the last year (£17,500 on average) price growth has stalled since the summer.
In the last 3 months, house prices have only risen 0.3%, compared to 2% in the summer.
And we’re expecting to see house prices fall in the first part of 2023, with annual price falls coming in by mid-year.
If our predictions are right, it’ll be the first time we’ve seen annual price falls for years, meaning a small respite for first time buyers who have faced continually rising prices and strong competition.
Generally speaking, the biggest house price falls will come in the south of England, where house prices are more expensive.
If you’re looking to buy in a high value market, this could give you the chance as competition eases and sellers start to reduce their prices to achieve a sale.
While you might find it harder to get a mortgage, buying remains cheaper than renting an equivalent home everywhere in the UK apart from London.
When you’re looking at homes for sale, check if the price has already been reduced with our ‘listing history’ tab. It can give you an idea if there might be room for the price to be discounted.
Be ready to move quickly in affordable urban areas
In lower-value markets, we’re still seeing high demand as mortgage rate rises have had less of an impact.
Demand is tracking at above average levels in affordable urban areas like Bradford, Swindon, Coventry, Crewe, Milton Keynes and Southend.
But first time buyers have the advantage of flexiblity and the ability to progress quickly, which gains even more favour among sellers in a softening market.
We expect these affordable areas will see above-average house price rises in the next year – but it’ll be at a much slower rate than in the last 2 years.
So if you need to save for a little longer or want to see if mortgage rates drop further, you won’t be seeing the same price rises as recent years and may find you’re in a better position by mid-2023.
We expect first time buyers to still look at purchasing their first home, where demand remains strong due to the recent rental price increases, making buying more attractive even with higher mortgage rates, especially in the South of England even with 5% mortgage rates.
With rent expected to rise again in 2023, driving more people to buy, the main challenge for many first time buyers is raising the deposit as many of the best rates are reserved for lower loan to value mortgages.
It’s recommended to get independent financial advice before you proceed.
Rush to coastal and rural areas finally runs out of steam as flats and urban locations make a comeback.
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Demand for homes in coastal and rural areas dips as buyers search out homes in towns and cities
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Cheaper to heat and run, apartments become a more appealing prospect for homeowners
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Affordable towns and cities, with good commuter links to major cities, become a more popular choice for buyers
The flight to rural and coastal areas looks to be shifting into reverse as buyers begin migrating towards towns, cities and urban areas.
These dynamics that have shaped the housing market over the last 5 years are shifting.
Affordable urban centres to fare better than average in 2023 but the inner London market may require another year before it is ready to rebound.
Since the pandemic began in spring 2020, buyers – freed from the daily office commute – have been casting their home searching nets further afield.
Rural and coastal areas, beautiful locations with pleasing home-office views, were in hot demand as buyers went on the hunt for more space in idyllic settings.
Competition for the perfect new home became fierce, with buyers willing to pay well over the odds to secure their ideal home.
That surge in demand inevitably pushed up prices, with some of the largest gains in house prices seen across Wales, the South-West, Norfolk and East Kent.
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Now, thanks to cost-of-living pressures and rising mortgage rates, affordability and value for money are playing a much greater role in determining what buyers are looking for.
These two factors will continue to be the big key drivers for the housing market in 2023.
Flats, cheaper to heat and run, in affordable urban areas, with plenty of job opportunities and services, have become a more appealing prospect for buyers at a time when living costs are running at such a high.
Buyers shift toward towns and cities
The shift from rural and coastal homes to urban homes is set to continue throughout 2023.
A greater slowdown in demand and sales has been seen across the beachside locations of East Kent, Torquay and Portsmouth – as well as the wider Lake District area (the Lancaster postal area) and mid-Wales (the Shrewsbury postal area) throughout 2022.
These markets are all slowing off a high base of activity but it now looks as though the initial wave of pent-up demand, brought about by more working from home and a spike in retirement, has run its course for now.
Conversely, major towns and cities including Bradford, Swindon, Coventry, Crewe, Milton Keynes and Southend are all registering above-average demand.
These areas all have their own employment base, but they also enjoy good transport connections into much larger employment centres, such as London, Leeds, Manchester and Birmingham.
We believe employment growth will continue to stimulate housing demand in these affordable city regions throughout 2023.
Urban areas to fare better in 2023
Influenced by mortgage rates, household incomes and the actual level of house prices, buyers are being priced out of the more expensive markets, preferring to look in areas where homes are more affordable.
Increasingly keen to secure homes in urban settings, where jobs are being created and more services are available, buyers are now showing a stronger preference for towns and cities.
The popularity of family homes in city suburbs and commuter areas is also on the up, with demand for homes in these areas rising to above average levels over the last year.
Affordability is the key to the outlook for house prices
Affordability and value-for-money will be the big key drivers for the housing market looking ahead into 2023 and beyond, influenced by mortgage rates, household incomes and the actual level of house prices.
The more unaffordable a market, the greater the number of households who are priced out, weakening demand and impacting sales volumes and pricing in these areas.
In affordable markets with lower average house prices the opposite is true.
