"It’s going to be a slow start to 2023 but we expect demand to pick up in the coming months as the economic outlook becomes clearer and mortgage rates settle around 4% to 4.5%"
Research shows that this is expected to feed into a rapid slowdown in the annual rate of price growth in the coming months. At the end of 2022, UK house price inflation had slowed to 6.5% from 8.3% at the end of 2021 - a trend matched across all regions except London.
Most areas recorded small price falls in Q4 2022 as buyers negotiated harder on price. Moreover, the discounts to asking prices to achieve a sale widened quickly at the end of 2022. But this gap between asking and achieved prices is now holding at 3% to 4% and there is no sign of this worsening at this stage.
This is important because if this gap widens, sellers will feel under increasing pressure to reduce asking prices putting further downward pressure on headline prices. Additional modest price reductions are likely over Q1 2023 as sellers continue to adjust asking prices in line with what buyers are prepared to pay.
Demand rebounds in line with pre-pandemic years
Demand for homes has rebounded in the first few weeks of 2023 but remains well below the levels of January 2020-2022. Current buyer interest is in line with the pre-pandemic years and 10% ahead of 2019.
This is not surprising. The last 3 years have been exceptional with the pandemic reshaping how households think about housing, driving more moves. Higher mortgage rates and living costs as well as weak consumer confidence have brought activity levels back to normal.
On a regional basis, demand and sales agreed are holding up in the North East, Scotland and Wales where home values are below the national average.
Market conditions remain weaker in the South East, South West and East Midlands, where prices are higher or have grown rapidly over the last 2 years, exacerbating affordability pressures.
Start of 2023 a slow burn
The start of 2023 will be more of a slow burn than in recent years. A portion of households hoping to move in the coming year will be waiting to see whether house prices start to fall more quickly in Q1, as well as how much further mortgage rates are likely to fall back.
Mortgage rates for new businesses are now generally below 5% and look set to remain in the 4 to 5% range in 2023.
This is a much better prospect than the 6% to 6.5% levels at the end of last year but buyers will remain cautious in the next few weeks.
As the outlook becomes clearer after Easter, we believe that demand is likely to pick up further. How much depends on the economic outlook and the strength of the labour market as well as the trajectory of consumer price inflation and what this means for interest rates.
Outlook
It’s early days to get a clear read on the market outlook for 2023. The economic outlook has improved slightly in recent weeks but the squeeze on household disposable incomes is very real with a direct impact on sales activity.
That said, the pressure on incomes combined with the costs of running homes is likely to drive a certain amount of movement in the market in 2023. Sizeable amounts of embedded equity in many millions of homes may also encourage more movement and downtrading to release equity and cut the energy bills, supporting home moves in 2023.
Zoopla's latest Value of Housing report found that the total value of homes in the UK is over £10.5 trillion. With circa £1.6 trillion of mortgage value, there is almost £8 trillion in housing equity in the UK.
Further, low single-digit price falls in H1 2023 are forecast for the short term, but the housing market is in better shape to deal with the headwinds than in previous economic cycles.
Richard Donnell, Executive Director - Research, said: “It’s going to be a slow start to 2023 but we expect demand to pick up in the coming months as the economic outlook becomes clearer and mortgage rates settle around 4% to 4.5%”
Nathan Emerson, CEO of Propertymark, comments: "Estate agents have noted a booming January with a rise in homes coming to the market and plenty of keen sellers present.
"Buyers are learning quickly that the power of the purchase is now in their hands due to competition levels easing for the first time in a while, but their purse strings are being tightened and some are now looking for slightly smaller, more cost effective homes than before."
