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Values and activity have been more robust in the first half of this year than previously expected, with recovery anticipated to come in 2024 once there are consistent signals that inflation is under control and lenders have the confidence to reduce mortgage margins.
At the end of last year the prospects for the housing market were looking bleak. This was in the wake of Liz Truss’s mini-budget, the market was uncertain, the value of the pound was falling and interest rates rising rapidly. Prices fell in Q4 2022 for the first quarter since Q2 2020 and most commentators expected falls to continue into 2023. Yet, the housing market defied expectations in the first half of this year. In November, Savills forecast price falls of -10% in 2023. But prices have actually fallen by just -1.4% in the first six months, and achieved prices were only 2.6% lower than July last year according to LonRes, continuing the trend of limited significant movement in either direction since late 2021. Market activity has also remained more resilient than expected, with completed transactions in the first five months of 2023 just -13% below the 2017–19 average. We can account this cautious positivity on the following:
First, strong wage growth has improved housing affordability. House prices have fallen by more than -12% when accounting for inflation. Earnings growth has exceeded house price growth by 10% in the year to April 2023, meaning buyers earn more relative to the price of their house now than a year ago.
Secondly, buyers have adapted their behaviour to the higher interest rate environment, taking out 30- or even 35-year mortgages in many cases to decrease their monthly bill and help them overcome affordability hurdles. This decision is driven by the strong incentive to leave the private rented sector, given that average UK rents have increased by 10.4% in the year to May 2023. This is helping to support demand in the short term, but further increases in mortgage terms will be limited because banks are reticent to lend to buyers who may be approaching retirement while still repaying their mortgage.
Finally, cash buyers have been very active, increasing their share of transactions to 46% in April, up from 34% in late 2022. With other buyers finding their budgets are squeezed by the cost of debt, cash buyers are taking advantage of a market with weaker competition to secure better deals. Many cash buyers are likely to be investors, for whom rental growth looks particularly attractive, given their returns won’t be diluted by the cost of a mortgage.
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