"While the economy is anticipated to contract further in 2023 and unemployment rise, the market does not expect this to be on the scale of what we saw in 2009."
Every year around this time we hear predictions as to what will happen to house prices over the coming year. While commentators rarely agree on how much they will gain or lose at any given time, this year there is one clear point of consensus – we are in for a fall.
How great this fall will be depends on whom you ask. HSBC is at the more conservative end of the scale, predicting a 3% fall, while Capital Economics takes a more pessimistic view; forecasting a 12% drop.
We are taking the middle ground and working on the assumption of a 7% fall in 2023, followed by a 3% drop in 2024, which should put us broadly in line with prices just one year ago.
We are already starting to see the beginning of this, with the latest Halifax House Price Index showing prices fell by 2.3% in November compared to October - the largest monthly drop since October 2008.
Of course, news of house price ‘crashes’ always causes jitters in the market. Yet a couple of years of house price falls in isolation is not necessarily a bad thing as this picture is usually reversed in a couple of years. Savills, for example, is predicting a 10% drop in 2023, yet overall, believes by 2027, house prices will have gained 6.2%.
In the short-term however, increased mortgage rates, the cost of living crisis and stretched affordability, mean we are likely to see all buyer demographics to some extent putting their plans on hold in 2023 - most notably, first-time buyers.
Positively, by the end of 2023, we should start to see this trend reverse, which should ward off any double-digit drops. And, while we won’t see mortgage rates return to their early 2022 levels, we do expect to see more competitive rates from lenders from the start of 2023. Even with swap rates priced as they are today, there is scope for lenders to reduce their pricing.
We may also see a change of approach from lenders and advisers in relation to mortgage terms, which should also aid affordability.
UK Finance recently reported half of all first-time buyers, and over a quarter of home movers who took out a mortgage in the third quarter of this year, opted for a term of more than 30 years. This compares with around a quarter of first-time buyers and fewer than one in 10 home movers doing so a decade ago. This, alongside anticipated wage growth – albeit lower than inflation – should ease affordability for first-time buyers.
We may also start to see lenders incorporate rental figures into their first-time buyer affordability. The average rent is now over £1,100 a month – which makes it illogical that mortgage payments lower than this could be deemed unaffordable for some buyers.
We are currently seeing first-time buyers take up rental demand while things settle in the first-time buyer market.
Rightmove recently reported that enquiries by those looking for properties to rent jumped by 23% compared to October 2021, in part due to increased demand from would-be first-time buyers.
Yet, given the stiff competition for rental properties and the sheer price of renting, I’m sure any prospective first-time buyers will not want to linger there long once house prices do come down and affordability improves.
Those intent on buying for the first time, or moving home, are more likely to delay plans rather than scrap them altogether. Smaller houses may become more appealing – and cheaper to run – as affordability becomes more of an issue. And, given some of the problems in the buy-to-let market we may see greater availability of more starter-type homes.
While the economy is anticipated to contract further in 2023 and unemployment rise, the market does not expect this to be on the scale of what we saw in 2009. Increased lender forbearance and the stricter stress tests introduced in 2014, will also help keep any double-digit house price falls due to repossession at bay.
Clearly, no homeowner wants to see their house drop in value, however a short period of house price correction can be beneficial at times to help re-align the market and should not be viewed as a bad development currently given the sharp rises of the last two years.
