UK property market hit by conflicting buyer and seller expectations

The gap between buyers and sellers’ price expectations is at its widest level since the start of the pandemic, as high borrowing costs cool demand.

An analysis of Knight Frank UK data found that offers were accepted at an average of 92.9% of the initial asking price in the first quarter of 2023 and at 94% in the second quarter.

These are the lowest readings since the second quarter of 2020 when offers were accepted at an average of 92.5% of the initial asking price. This was a period that saw the closure of the property market for eight weeks due to the first national Covid-19 lockdown.

The ratio is 100% when the asking price has been met. Anything below this indicates downwards pressure on asking prices.

UK residential property sales

The ‘race for space’ triggered by the pandemic, along with a stamp duty holiday, saw demand outstripping supply and a house price boom that drove UK house prices up 25% between the temporary closure of the market in March 2020 and the end of 2022.

UK house buyer sentiment weakened

However, sentiment has weakened in recent months in recent months with the Bank of England (BoE) having now made 13 consecutive increases to the base rate taking it to 5%, its highest level since 2008, in a bid to tackle stubbornly high inflation.

While yesterday’s surprise fall in inflation was welcome, it is unlikely the BoE will view that its work raising rates to contain inflation is done.

“With the pandemic boom behind us and interest rates at highs not seen since the global financial crisis, the UK housing market has become extremely price sensitive with buyers no longer willing to pay a pandemic premium,” said Chris Druce, senior research analyst at Knight Frank.

Mortgage affordability

The increase in the bank rate has fed through into higher borrowing costs, reducing buyers’ spending power and appetite. While buyers trimmed budgets rather than abandon purchases initially, demand has continued to moderate.

UK Mortgage approvals for purchase were down by a quarter in May compared with a year ago, and the average house price has declined by 4.1% since peak in August 2022, according to Nationwide.

“The buyers that are in the market at present are serious and moving out of necessity for family or job reasons,” said Sarah Briggs, head of Birmingham sales at Knight Frank.

“However, the challenge is where buyers want to purchase at ‘next years’ prices’ and sellers think they can come to market at last year’s prices,” Sarah added.

House price forecast

We expect house prices will fall by 10% through this year and the remainder of next year due to the cost of borrowing and an increase in supply relative to the pandemic.

However, strong wage growth, record levels of housing equity, amassed lockdown savings, and the availability of longer mortgage terms will limit the drop and support prices once rates stabilise.

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