The ‘great recalculation’ will have to wait until 2023
The mini-Budget has muddied the waters, but next year will bring more transparency around the true condition of the UK housing market
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Rarely has the current state of the UK property market been such a poor guide for what happens next.
Yes, prices and transaction volumes will come under continued pressure, but the last quarter of this year is hardly a useful yardstick for 2023.
The reason is simple. Mortgage rates have not resumed the path they were on before Kwasi Kwarteng’s mini-Budget three months ago.
Financial markets took fright at the previous government’s low-tax economic plan and borrowing costs spiked by around 150 basis points in anticipation of higher inflation.
We have a new government, but mortgage rates are playing catch up and only declining slowly.
It has created a disorderly picture for the UK housing market at the end of 2022, with a wide range of motivations prevalent among buyers and sellers.
Some buyers have mortgage offers that pre-date the mini-Budget, which means moving quickly is more important that haggling on the asking price. In other cases, budgets have been cut as monthly repayments rise. More discretionary buyers will stay on the sidelines while many will have no option but to move now.
Nationwide and Halifax have reported steep monthly declines against this somewhat chaotic backdrop. In reality, it’s probably best not to read too much into recent data, as we explain here.
Until mortgage rates stabilise, the great price recalculation after 13 years of ultra-low borrowing costs cannot take place.
The question is: by how much does a house fall in value when enough prospective buyers have to pay several hundred pounds extra each month for the mortgage?
We think prices will fall by around 10% over the next two years as this sort of arithmetic takes place.
That said, we don’t expect the cliff-edge moment for prices seen during the global financial crisis, for reasons explored here, which include low loan-to-value lending, low unemployment and low supply.
In the meantime, the property market in the UK is proving resilient.
The number of exchanges and new prospective buyers across the UK was broadly flat compared to the five-year average in November, Knight Frank data shows.
Meanwhile, the number of offers made was 18% lower, reflecting the volatile lending landscape, although it was an improvement on the decline of 24% recorded in October.
For the reasons mentioned above, the pipeline of transactions is still relatively robust and the number of offers accepted across the UK was 13% above the five-year average.
As inflation peaks, mortgage rates edge downwards and the bank rate heads in the opposite direction, the picture will remain clouded.
Six months from now, once many more borrowers have punched their new details into an affordability calculator, the outlook for house prices and transaction volumes will come properly into focus.