The oil tanker might be turning, but it isn’t sinking.
By any measure, the last two years have been exceptional for the residential property market. At its peak, average prices had risen by over 25%, buyers were fighting over anything that came on the market and ‘offers over asking’ were the norm.
The reasons behind the wholly unexpected bull-market were clear to see; the lifestyle changes prompted by the lockdowns and the ‘work from home’ revolution, historically low interest rates, a red-hot employment market and the consequent dramatic imbalance between supply and demand.
However, in February of this year, the world changed.
Russia invaded Ukraine and set off a chain of events, the effects of which would touch us all. Fuel and energy prices soared, and as a result, inflation began to climb and consumer confidence started to fall. It didn’t take long to affect the property market. Although the more visible consequences didn’t become apparent until much later in the year, the early warning signs were there.
The GfK Consumer Confidence Barometer began a downward journey at the end of summer 2021, but the crisis in Ukraine accelerated the trend, taking us down to record lows by the Autumn. History tells us this reliable bellwether of the economy is generally three to six months ahead of the property market and that certainly proved to be the case in this cycle. Asking prices, the first tangible sign of a changing market, began flattening as far back as April – something I highlighted at the time – and it was clear we were in transition.
The situation was further exacerbated in the summer by political instability, and chancellors – and even prime ministers – began to fall. Then, in September, came the infamous ‘fiscal event’; the mini-budget that sent the markets into meltdown. Mortgage rates rocketed and loans were snatched away from hopeful buyers as the banks and building societies reacted with near hysteria.
As summer gave way to autumn, asking prices began to be challenged; sales fall-throughs increased and the mood changed in developer boardrooms up and down the country. Cancellation rates soared and the dreaded down-valuations were back on the agenda during Monday morning sales meetings. The dramatic imbalance between supply and demand, which had played a huge part in fuelling this mini-boom, had been easing since late spring, and these latest developments sent the process into overdrive.
The oil tanker that is the UK property market has been brought about, no question, but it has not hit the rocks.
I am still confident that we will not see a property price-crash. The ‘click-bait’ headlines proclaiming possible price falls of “up to 30%” (Why is it always 30%?) are over-blown, regardless of what they might say in the Mail and Express. There is little doubt we will see a correction over the next 12 months, but there are all sorts of reasons why it will be a correction and not a crash.
Let’s take a look at those reasons:
• Although we have just seen yet another rise in the Bank of England base rate, to 3.5%, with the probability of more to come, fixed-mortgage rates have stabilised after the initial panic and are more likely to fall than rise in the coming weeks and months.
• Despite the likely reduction in volumes next year, there is still a shortage of quality property on the market, so the supply/demand imbalance will be an issue for a little while yet.
• Despite the new chancellor’s best efforts, it was too late to claw back the changes in Stamp Duty rates introduced in the mini-budget, so the threshold stayed doubled to £250K (from £300K to £425K for first time buyers) and they’ll be with us until March 2025.
• After the financial crash in 2008/9, much stricter controls were introduced to stress test borrowers and lenders to avoid the same thing repeating itself. As a result, in the event of a significant downturn, repossessions will be lower and the institutions will survive.
• Inflation appears to be at the top of its cycle and seems likely to stabilise, or even fall over the coming months. That will ease pressure on base rates and will restore damaged confidence.
• The employment market is still strong and that has a significant, though slightly longer term, effect on prices.
I don’t want to paint too rosy a picture, but all things considered, I just cannot see a catastrophic fall in values. That doesn’t mean there won’t be pain. Those regional markets that roared away in 21/22 will see the biggest corrections. As will the builders, who took advantage of the severe shortage of property on the market to push prices and are already feeling the harsh reality of seeking exceptionally high asking prices in a more balanced market – and now with no ‘Help to Buy’ to lean on.
When forecasting price movements, I start by building my ‘Market Factor Matrix’. This considers all those things that are likely to move prices forward and all the negative factors that will drag the market down. I have already set out most of the positives, but on the minus side I include the following:
• Low consumer confidence
• High homeowner running costs
• Higher mortgage rates
• General inflation
• Low affordability
All of these factors will play their part and they will vary as things happen through the year, but on balance, if I’m right about mortgage rates stabilising and inflation having reached its peak in this cycle, then the market will retain some of its momentum. I see us returning to the type of market that was typical in the five years up to 2019, before Covid struck.
This time last year, I predicted UK housing volumes would end up at around 1.3M and although it will be a couple of months before the numbers are confirmed, I don’t think I’ll be far out. I forecast that prices would end the year 6% higher than 2021 and I might be a couple of points out come January – if it hadn’t been for the Truss/Kwarteng odyssey, I would have been right on it!
So what for 2023?
Well, volumes first. Although I see a return to the pre-Covid typical market (around 1.2M), I do think volumes will take a hit next year, just while people sit on their hands wondering what the market will do. I believe we’ll see around 1M transactions in the year, but I do think we’ll see the open-market new homes share reduce, probably to around 12.5%.
Predicting average values is much trickier, and, as always when I set out a forecast, I include the caveat that unforeseen events can, and will, have an effect. Think ‘mini-budget’, invasion, political uncertainty, etc.
I do think we will see negative inflation in prices next year, but not nearly as bad as has been suggested. I believe there will be a slowdown in January and February – but not into negative territory year-on-year, I then think we’ll see an uptick in values in the spring before an easing through the summer and ending the year at around 4% lower than they were at the end of 2022.
So, there you have it. What you can’t see in an ‘average price’ forecast are the myriad variations in local markets and property types. Markets that have been very strong since 2020, like Nottingham, Manchester, Bournemouth, etc. will see the sharpest declines, while those that have not felt the full benefit of the uplift of the last two years will not be pegged back so strongly.
Detached houses, with space to live in, inside and out, with a great EPC rating and good broadband will retain their value much better and may even end next year still in positive growth.
The UK property market is like the proverbial oil tanker and does take a long time to turn around (unless it is torpedoed of course), this transition started back last spring. But, to stretch the analogy, she is not holed below the waterline and is not headed for the rocks. We all need to stay calm, be realistic and perhaps a little more cautious than usual. I’ve seen much worse markets in my forty years in the business.
Happy New Year.
Join us on 26th January 2023 for MarketCast IX – register here: https://lnkd.in/eTNeNqxX