Capital Economics expects prices to fall by 12% through to 2024, the Centre for Economic Business Research believes that prices will fall by 8-10% during 2023, and Zoopla says that if the market falls by 5%, we will see most of the “current over-valuation reversed by December 2023”.
The truth is that some or none of these pricing forecasts could be correct, as it is ultimately the prices at which properties are sold for, that dictates these figures. And those ultimate sales prices are dependent on demand which varies considerably across markets. Heightened demand will drive a property’s price above its worth, while less demand has the opposite effect. Markets adapt in response to this demand, which puts a lot of the forecasting onus on a mortgage environment that translates prospective buyers, into actual buyers.
With base rates now at an unexpected high of 3.5% and likely to rise more to combat inflation, the latest forecasts in 2023 suggest there will only be a partial reversal in rises seen over the past two years. It is likely to be a reversal nonetheless. There are signs that mortgage rates and availability issues are beginning to settle, following an extremely turbulent couple of months in the wake of the now infamous mini budget.
It is equally true that property sales won’t collapse while rental properties remain in short supply, and it is worth noting that in some parts of the country it is still cheaper to buy than rent so, as a buyer, if you can find the right property, raise a deposit, and find a mortgage rate for your budget, then do still look to buy and contact your local expert.
Prospects for first-time buyers look more positive as vendors could show more flexibility when it comes to pricing and offers. Despite a reported 42% having their deposits saved, the consensus plan of action seems to be to hold off and see what 2023 brings. But this delay in decision making could see some first-time buyers hold off to their detriment, resulting in an even more congested rental market is the inevitable consequence. The uncertain picture often painted in this landscape can put purchasers off from making a decision now. If purchasers have a deposit saved already, and are able to secure a mortgage, this in many parts of the country makes it still cheaper to buy than to rent.
First-time buyers who want to get on the ladder have found it exceptionally difficult due to the mortgage situation. That means demand for properties in the first-time buyer range has fallen quite sharply, while those who are trading up – or down – have been less affected. Ultimately, this could lead to a situation in 2023 where the price of flats – that are typically more affordable for first time buyers – are likely to fall that bit more than houses.
How many people with hindsight now think they should have purchased during the stamp duty holiday in 2021-22, or are landlords who wish they had added to their portfolio in 2008? As Albert Einstein famously said “In the middle of difficulty lies opportunity.”
Mortgages have also brought chaos to the relationship between sales and lettings, as documented by Rightmove’s November market update. The number of people enquiring about rentals is up 23% on 2021’s figures, as many first-time buyers move to ‘plan B’ i.e. renting instead of home ownership amid a double whammy of both higher property prices and rising mortgage rates.
Letting and Buy to Let
A likely result of the mortgage turbulence is growth in the lettings industry during 2023, as more people tend to rent in a recession than commit to buying a home. Aspiring investors are well placed to look to purchase properties being marketed at reasonable value. A lack of quality rental stock means improved yields due to increasing rental prices and reducing sales prices. We therefore, expect to see a reduction in the amount of landlords selling, which will help supply. The buying landscape will still force many potential tenants into the already-congested rental space, with supply unlikely to catch up to the demand quickly enough.
There is still a lack of availability of quality rental stock due to some landlords choosing to divest in recent years due to taxation. Whilst existing taxation rules will remain unchanged in 2023, improving yields versus reducing sale prices are expected to reduce the number of landlords selling and help supply. In the meantime, landlords should also be seeking value-add approaches to maximise their investment performance such as setting up as a limited company, complete with technical, fund and share structure management services via a dedicated provider.
The Rental Reform Bill aims to level the playing field for tenants and whilst the new laws will need to be understood, the changes around Section 21 and possession rights are not nearly as punitive for landlords as some of the headlines suggest. In addition, future-proofing investments by prioritising energy efficiency not only makes those properties attractive during today’s cost of living crisis but ensures they are well placed for changes to EPCs in the years ahead.
RICS reported that in 2023, homeowners will struggle to make mortgage payments, leading to a rise in repossessions. We would suggest the more likely outcome will be an increased shift from fixed to variable mortgage rates, although this will lead to higher payments overall of course. For both existing and prospective homeowners, it is advisable to seek a dedicated mortgage broker and advisor to keep on top of real-time fluctuations and to avoid negative upshot.
Even if buyers can overcome the financial hurdles of finding a new property, the length of time between purchase and completion can often derail an ultimate move. The appeal of auctions, to cut through some of the initial stages, has risen in stock as a result. For both buyers and sellers, auctions can represent a more direct opportunity to strike while the iron is hot, should conditions become more favourable over the course of 2023.
Ultimately real estate has become a team sport: given the interplay of cause and effect across both sales and rentals and impacted by the wider socio-economic situation, there isn’t one member of the ecosystem who can say they have a complete grasp on the market. Landlords, homeowners, prospective buyers, and renters – they all need guidance into 2023, and the three specific areas of interest mentioned above really epitomise the scope of challenge, but also opportunity should people find the right advisors.
Written by Michael Cook, Group Managing Director, Leaders Romans Group