Turning the page

New year, new start, as the saying goes. We forecast that 2023 will be a year of transition during which buyers adjust to the higher interest rate era – a process that may take time or happen rapidly. However, we also expect that, by 2024, the property market will find its new normal.

The political chaos and stock market turbulence in the autumn of 2022 caused the market to slow. But, to date, the decline has been more of a bump back to reality than a crash.

We think the first half of 2023 is likely to be the most challenging thanks to the cost of living squeeze. Mortgage rates will be at their highest, although still below the rates of 6% that followed the mini-Budget. These factors will dampen demand from buyers and make some owners wary of putting their homes on the market. However, we forecast that deals will still be done – and it is likely that more than 90% of those who sell a home this year will still make a profit.

Cash buyers, mostly downsizers, are set to play a crucial role in the market in the months ahead. Meanwhile would-be first-time buyers will be constrained by the increase in mortgage rates, and the difficulty of accumulating a deposit amid the cost of living squeeze. Some will delay their purchases. But others will compromise on location or space to achieve their dream of home ownership.

Buyers and sellers will negotiate to establish a new middle ground, in a process that is already under way. A lack of stock will, for the most part, underpin prices, although affordability will limit buyers’ ambitions.

The big question is: Will house prices fall or not? The risks of a decline are undoubtedly greater than they were last September when we forecast that price growth would flatline by the end of 2023. Mortgage rates increased far more sharply than we expected, but since their October peak, rates have started to come back down to a more manageable level. While buyers reacted to this spike in October and November, sentiment seemed to settle in December with an uptick in what buyers were prepared to pay.

The direction of mortgage rates will set the tempo, but we do not foresee sizeable price falls just yet. We believe that the recession, while painful for so many households, is likely to be shallow. The stricter lending criteria and stress testing of mortgage applicants, introduced in the wake of the global financial crisis, should also limit forced sales – a key stimulant of price falls in 2008.

The areas in most jeopardy are those where price growth has been strongest in the past few years and where buyers are most financially extended. The prime market, in which more people own their homes outright and buy with cash, seems set to fare better. It is transactions that are likely to take a bigger hit this year as buyers and sellers ponder their strategies for the new interest rate environment.

The three Ds – debt, divorce and death – will be the reason why most properties are put up for sale. However, there are still a number of households looking to make their first post-Covid move. Many have accumulated considerable equity in their homes, providing a cushion against economic turbulence.

We forecast that rents will remain in positive territory – which has not been the case in previous downturns. The same factors weighing on house price growth will bolster demand in the rental market. Adding to the upward pressure on rents will be the extra costs facing landlords. But tenants’ squeezed budgets mean that the increase in rents is unlikely to exceed 5%.

Looking ahead, the Bank of England is likely to begin cutting interest rates towards the end of the year. Such a move would help bring down mortgage rates, aiding affordability. We think mortgage rates will settle around the 3-4% mark longer-term. This should spark a revival in prices, but the end of the days of easy money will act as a brake on the pace of the bounce-back.