The Budget 2023: what is the impact for the UK housing market?
The economic backdrop has improved, but things could turn more political this year.
3 minutes to read
We are nine months into a recession that never happened.
The forecast was made by the Office for Budget Responsibility (OBR) in November and revised away in last week’s Budget.
Only four months ago, Bank of England governor Andrew Bailey said the UK was facing its longest recession on record and unemployment would peak at 6.5%. Last week’s OBR forecast was 4.4%.
It’s fair to say that a range of economic indicators are proving better-than-expected and the housing market is no exception, as we noted last week.
It feels like an odd moment for the OBR to increase its forecast for a house price decline by a single percentage point, which it did last week. It now predicts a 10% fall from the Q4 2022 peak.
Mortgage rates
The fact a recession may well be averted, and inflation forecasts also fell in the Budget will only boost sentiment among buyers and sellers.
Five-year fixed-rate mortgages are around 4% compared to 2% this time last year, but the key is the overall sense of stability that has returned. Any rate changes this year will pale into insignificance compared to what took place following the mini-Budget.
If anything, the pressure on rates is downwards as lenders become more competitive in a lower-volume market, as we also explored last week. The OBR said it expected sales volumes to drop 20% from Q4 2022. A future revision to a smaller double-digit decline wouldn’t be a surprise.
If central bankers adopt a less strident approach to higher rates following the collapse of Silicon Valley Bank this month, the downwards pressure will intensify. The swap market is certainly pricing in a change of tack, with rates falling after the demise of the California-based lender was attributed to aggressive monetary tightening.
In short, a solid start to the year for the UK housing market has been enhanced by an economic backdrop that has become more favourable over the last ten days.
House price pressures
None of which means prices won’t come under pressure.
There will be a sharp intake of breath among more homeowners as their fixed-rate deals come to an end and more distress will inevitably enter the system, though lenders will be keen to avoid fire sales.
The other reason prices will come under pressure is higher supply, which hasn’t been a feature of the market since before the pandemic. Demand has been insatiable and supply tight for the last three years, particularly during the stamp duty holiday. It’s easy to forget that as choice increases, prices may well soften.
The number of market valuation appraisals in the UK, which is a leading indicator of supply, was 16.4% above the five-year average in February, Knight Frank data shows. Meanwhile, the number of new prospective buyers was 11% higher, suggesting supply outpaced demand last month.
It’s also true that some sections of the market will suffer more than others.
First-time buyers, who typically have the lowest levels of equity, will be squeezed hardest by higher rates. Demand for a four-bed house may be stronger than a two-bed house on the same street.
Some of them will become tenants, adding to the imbalance that has caused double-digit rental value growth over the last 18 months.
Another positive aspect of the Budget was the absence of measures that could further discourage landlords from entering the sector, which would amplify the imbalance.
That said, policy has been formulated in recent years with zero concern for the laws of supply and demand. If you deter enough new and existing landlords, you will create upwards pressure on rents. Given the size of the recent increases, the economic arguments need to be considered alongside the political capital earned from demonising the buy-to-let sector.
Only last week, we read about tenants being priced out of the UK’s major cities.
However, with a general election creeping onto the radar, politics will be in the ascendancy this year, which could be bad news for both landlords and tenants.
There will be a lot more at stake in the next Budget.
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