Will House Prices Go Down in 2023?

More importantly, will house prices go down in 2023? Many Brits hoping to get on the property ladder have their fingers crossed, hoping that house prices soften soon. But, will these first-time buyers get priced out of the market – not because of house price growth – but because of other factors? Let’s address all of these questions in detail. But, before that, let’s assess the general state of the UK’s property market.

Will House Prices Go Down in 2023: Boom, Correction, or Crash – What Can We Expect in 2023?

For the average Britisher, getting on the property ladder may get more accessible in the latter half of 2022. The Bank of England’s recent decision to relax some criteria for securing a mortgage. Indicates that people who’ve been unable to buy a property in recent years due to ever-increasing prices may find some relief. Plus, many industry experts are expecting a slowdown in the property market. According to the Office for National Statistics (ONS) – 

• Between 2021 & 2022, house prices in the UK rose rapidly. The month-on-month rate peaked at 12.8% in May 2022. What does this mean? Let’s say a house was valued at £20,000 in May 2021. You’d have to pay 12.8% more to buy the same property in May 2022. 
• Between May and June 2022, average house prices in the UK did increase. But, the annual house price inflation rate had slowed from 12.8% to 7.8%. So, if you were buying a property that was valued at £20,000 in June 2021, you’d only have to pay 7.8% (not 12.8%) more in June 2022.
• The average house price in the UK in 2022 was approximately £286,000 in June. That’s still £20,000 or 7.8% higher than in June 2021. It was also higher than the average house price in the UK in May 2022 (£283,000). But, the growth rate was decreasing, and there were signs of a slowdown. 
• In July 2022, prices fell for the first time in over 13 months. According to data from mortgage lender Halifax, house prices fell by 0.1% in July 2022. It was the first month-on-month fall recorded since June 2021. The drop-off sent the average UK house price down by approximately £365.  

What Can We Expect in 2023?

The signs of a slowdown in the property market are apparent. After several months of continuous growth, June 2022 finally saw the UK’s annual house price inflation rate slow to 7.8%. Will this news be a source of revelation to those who haven’t been able to buy a property due to the booming prices in recent months & years? Or, will mortgage approvals drop & household costs rise to cool down activities in the UK’s property market?

Why is the Average House Price in the UK So High in 2022?

If you live in the UK, you know that the “housing crisis” isn’t new. The Housing Act of 1980 (famously known as the Right to Buy) enabled council tenants to acquire their homes from the state at huge discounts. This act opened the doors to homeownership for millions of people. But, by the late 90s, much of the social housing stock in the UK had disappeared into private hands. Since then, the average home price in the UK has increased by four times. 

• According to the Land Registry, the average price of residential property in the UK was £57,726 in June 1990. 
• In 2020, that figure was close to £234,947 – four times higher. 
• In 2021, the average house in England cost approximately nine times the average annual disposable household income. 
• Welsh house prices are presently six times the average disposable income, and Scottish homebuyers pay more than five times on average. 

The Impact of Covid-19 on Rising House Prices

The recent pandemic-fuelled house prices boom further affected the UK’s housing affordability. The demand for new properties skyrocketed as soon as the pandemic lockdown restrictions were lifted. The number of property sales & acquisitions recorded between 2020 & 2022 was the highest the country has seen since 2008. Borrowing money was also pretty cheap until 2022. As a result, it was relatively easy to find sub-1 % mortgage deals in 2021, especially for those with massive deposits. 

“And a new philosophy emerged called quantum physics, which suggest that the individual’s function is to inform and be informed. You really exist only when you’re in a field sharing and exchanging information. You create the realities you inhabit.”

Timothy Leary

That’s why you’ll always find house price bulls claiming that this market will never crash. According to them, the demand for houses in the UK has outstripped supply for decades. This trend won’t change anytime soon. Wrong. On the surface, the key, long-term drivers of the UK’s housing market have been simple supply and demand forces. But, a critical factor that house price bulls need to consider is low-interest rates—all of these factors combined with maintaining growth and stability in the UK’s housing market.

The Impact of Rising Interest Rates on House Prices

For years, record-low interest rates have powered the housing market in the UK. The ability to borrow money cheaply made it easier for aspiring homebuyers to afford mortgages. However, on 16th December 2021, the Bank of England increased the interest rate by 0.15 percentage points. Then, in August 2022, they hiked interest rates again – this time by a whopping 50 basis points – the most significant jump recorded since 1995. This increase takes borrowing costs to a whopping 1.75%. Further rate hikes are expected throughout 2022 & 2023. 

Many traders are betting that the Bank of England will raise interest rates from 3% (present rate) to 4% in 2023 to combat soaring inflation. Such a move will place mortgage holders under even more pressure & severely dampen the housing market. How much will more pressure mortgage holders face if interest rates hit 4%? According to Zoopla – 

• If mortgage rates hit 4%, the average first-time homebuyer will need £12,250 more in annual income to meet mortgage criteria. 
• Homebuyers in London will need £35,000 additional annual income to meet the criteria. 

If rate hikes continue, even the borrowers coming off long-term fixed mortgages could see their pending repayments shoot up indiscriminately.

The Impact of Increasing Living Costs on House Prices

For countless people, mortgage repayments are their most significant monthly financial commitments. But rising interest rates are just one of the reasons industry experts expect a substantial slowdown in the UK’s housing market. According to them, increasing living costs will be the main reason behind the slowdown.

• Household budgets across the UK have come under severe pressure in the past six months. Fewer people can afford to overstretch their budgets to buy homes. 
• According to the Office for National Statistics – 89% of adults in the UK reported steep increases in their day-to-day living costs in August 2022.
• According to the Bank of England, the average post-tax household income in the UK will decrease by 1.5% in 2022 & 2.25% in 2023.
• Energy bills in the UK are set to go from £15 billion in a typical year to a whopping £75 billion in 2022. For the average taxpayer in the UK, that’s the equivalent of paying 29% more income tax. 
• On top of that, almost every adult in the UK is spending more on National Insurance due to the new social & health care levy.

How Does The Cost of Living Affect House Pricing?

Under these circumstances, it’s impossible to expect house demand to remain steady. And that’s before we even consider the rising costs of everything else. For example –

• Food prices in the UK increased by 5.1% in August 2022, according to the British Retail Consortium (BRC). This was a 9% increase from the 4.4% reported in the previous month of July. These figures mark the highest level of food inflation the UK has seen since the financial crash of 2008. 
• According to the Office for National Statistics, millions of families are slashing spending wherever possible. So far, 11 million people have used their savings & 6 million people have used more credit than usual to keep up with the rising living costs. 

These factors will undoubtedly result in the housing market losing momentum. Buyer enquiries will keep dropping & so will the number of mortgage approvals for property purchases. House prices will fall. But, many first-time buyers will still get priced out of the market due to the rising costs of day-to-day living. On top of that, the labour market in the UK isn’t getting any stronger.

The Labour Market & the Housing Market Price

In the first quarter of 2022, the unemployment rate in the UK fell to its lowest-ever level. As a result, there were 1.3+ million job vacancies in the UK during this period – the highest ever recorded. But, the number of job vacancies isn’t rising anymore. The UK’s unemployment rate peaked in the first quarter of 2022, and there’s only one way to go from here – downhill. However, the real value of UK workers’ salaries will continue to fall. 

For over 20 years, wage increases have been outstripped by spiralling inflation rates. According to the Office for National Statistics, yearly growth in average pay (excluding bonuses) has increased by 4.7% till June 2022. But, soaring inflation & the cost of living crisis have combined to outstrip these wage increases. 

In 2022, low unemployment and many job vacancies have resulted in the average Britisher earning more than ever. However, the real value of what these workers earn is decreasing every month due to inflation & the soaring costs of living. After considering all these factors, it’s fair to say that house prices could fall significantly over the next 12 to 24 months. 

Will House Price Go Down in 2023?

Nationwide figures for house price growth in the UK are still in double digits in 2022. But, the rise has slowed drastically in recent months. So, what can we expect in 2023? Is there an impending crash in the country’s housing market? A “crash” is a market phenomenon where assets experience price drops of 20% or more. Such a scenario is highly unlikely in 2023. But, a correction is highly likely. 

A correction is a market phenomenon where assets experience price drops between 10% to 20% and not more. The UK’s housing market could be in line to face such a drastic correction if the global economy takes a substantial plunge. This prospect looks more and more likely as inflation rates are set to reach record highs in 2023. 

• According to the National Institute of Economic and Social Research, gas price hikes and the rising costs of food will send inflation over 11% by January 2023. High inflation will cause businesses & consumers to rein in spending, especially in the housing market. 
• During the recession that came after the 2008 international financial crisis, house prices in the UK fell uniformly across all regions until April 2009. The national average drop in house prices was approximately 21% during this period. 

The Bank of England has not technically predicted a recession. However, If the UK’s economy goes into a similar recession, we can expect similar drops in house prices. Even a correction (price drop of 10% to 20%) could negatively affect the country’s housing market. 

In conclusion, Will House Prices Go Down in 2023?

It’s hard to predict whether the UK’s economy will crash and take the housing market down in 2023. But one thing is for sure – the UK housing market will face a long period of stagnation in 2023 & beyond. If you’re an aspiring homebuyer, here are some things you can do to prepare for this period of stagnation & overall economic distress –

• Broaden your search area. Make sure to limit your property search to specific locations. 
• Even on a 4% interest rate, paying a mortgage will be slightly cheaper than paying rent in most places. So, unless you plan to get a home in a city centre with high rental rates, plan on applying for a mortgage.
• Ask your friends/family for help with getting a bigger deposit. You can reduce your mortgage’s size & cut down the amount you owe in interest by coming up with a bigger deposit.
• Use tax-free savings schemes & ISAs to save for your deposit. 
• Learn about the latest (click on the link to learn more) First Home Scheme Uk launched by the government. For example, The First Home Scheme UK has proven very popular among new-age property buyers.

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