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We entered 2023 with high inflation and rising interest rates, which is putting pressure on growth, particularly as the cost of borrowing increases. As the cost of living crisis has intensified, house prices have already started falling. According to the Halifax the average house price dropped 2.3% in November from October.
The Bank of England is expected to continue to raise interest rates into 2023 to a peak of around 4.75%, which is likely to have a negative effect on buyers. British banks are expecting to lend 23% less to homebuyers this year, taking mortgage volumes back to their pre-pandemic levels and ending a two-year boom.
Jones Lang LaSalle is forecasting a 6% drop in house prices this year and expects a recovery to 1% price growth in 2024 as interest rates fall back and inflation is contained.
There appears to be a lot of support for Capital Economics' view that "for affordability to return to a sustainable level by the end of 2023, when we think mortgages will still be around 5%, the average house price would have to drop by 20%. On the other hand, were market and mortgage interest rates to drop faster than we expect, that would limit the fall in prices."
The longer term view taken by Savills, predicts that house prices will rise overall by 6.2% by 2027, so perhaps the stage we're in is like a natural reset button allowing the housing market to become more affordable after a chaotic few years.
For investors, this is a prime opportunity to invest in UK property while prices are low but set to increase. There’ll also likely be a period of focus, particularly on investors’ asset classes and regions.
With over one third of the 23.5 million UK households being either private or social rentals, the UK rental market has been experiencing growth for a number of years with an average total income increase of around 0.6% since 2017. Given there’s no immediate solution to the housing crisis, it’s expected that this rise will continue. It’s also likely that the vast majority of 18-35 year olds entering the housing market will opt for a rental rather than buying a property outright.
Space within larger UK cities such as London, Birmingham and Manchester is also becoming harder to come by and land is at a premium. Because of this it’ll come as no surprise that many housing developers are opting to build larger and larger residential blocks to house the UK’s growing urban populations. These new buildings often come with amenities such as gyms and communal spaces making them very popular, especially with the younger demographic. Developers are keen to capitalise on this trend and expand their block management portfolios.
So whilst there are bumps in the road ahead, it’s likely that this blip that we’re all feeling is temporary. As the first shoots of spring start showing, it’s likely that we’ll begin to feel a positive economic shift. Residential property is used to evolving quickly and doubtless it will do so again, but this time with the backdrop of ESG. Land owners, developers and investors will need to get the fundamentals rights in order to meet the changing demands of consumers, the new financial realities and the additional socio-political factors. For those that do, it looks like a great few years ahead.
Written by Ollie Hampson & Jo Wright