So what are the chances of a recession in housing in the UK in 2023? Here are four reasons why I expect house prices to fall over the next 12 months. Let’s, first of all, take a look at what has happened to property prices between 2005 and the Autumn of 2022 I’m using the Halifax house price data here.
Other surveys are available, but you can see the Relentless March of house prices increases in particular since the pandemic, the summer of 2020, with prices climbing towards the 300,000-pound average.
Well, the housing market has defied gravity for many years, but here are four reasons to think that house passes, and property valuations will come down in the next year or so. The first is that mortgages have become more expensive.
Reason 1: Cost Of Home Loans
The cost of a home loan has gone up sharply and they’re likely to stay high. Indeed, millions of people face the challenge of adjusting to much higher two and three, and five-year fixed-rate mortgages.
During 2023, around 2 million British borrowers must remortgage their house between now and the end of next year. That’s about 25 of all the outstanding mortgages left in the UK and with incomes going down in real terms and taxes going up.
Many people will not be able to afford those extra mortgage repayments and here’s the picture showing interest rates in the UK for mortgages of different types. You can see the sharp change in the interest rate environment in the last six months in the UK.
Indeed, mortgage interest payments as a share of disposable incomes are expected to climb from seven percent to nearly 10 percent, which will be the highest since the global financial crisis of 2008.
Reason 2: Collapsed Consumer Confidence
The second reason why house prices are likely to fall is that consumer confidence has collapsed. Animal spirits have fallen, and people have less money to save, which makes it harder to find the money for a deposit for a mortgage, and this fall in confidence is associated with one of the deepest cuts in real disposable incomes for decades. The people at work are seeing cuts in their real pay. Unemployment is starting to rise and the tax burden is. The overall burden of direct and indirect taxes is now at a 70-year high.
Here’s the chart showing consumer confidence. You can see. What’s happened that the long-term average is given a value of 100, you can see where we are now in the Autumn of as we come towards the end of 2022 in terms of consumer confidence, it has fallen very sharply.
Reason 3: Recession
The third reason to expect a looming recession is that already we’re seeing the asking price for properties starting to go down. Zoopla is saying that there’s been a 40 to 50 percent reduction in housing buyer demand. A lot of potential buyers are stepping back from the market, maybe postponing making an offer a bid for property sellers are having to lower their asking price to tempt would-be buyers.
Indeed, according to Zoopla who published data on this, sellers were accepting four percent discounts on asking prices to achieve a sale and those discounts are likely to go up as we head into the new year
Reason 4: Landlord Sector
The fourth reason is that landlords are getting Nervous, the landlord sector, of course, the buy-to-let sector has been a factor driving up demand for property generally, but landlords are facing a big squeeze.
The costs of running properties, energy costs, the cost of Maintenance, and things have gone up. The mortgage costs on those properties, those buy-to-lets, of course, have become more expensive and there’s clear evidence that some landlords are now looking to sell, which, in the short term, will increase the supply of properties on the market and therefore uh bring down prices and Demand for buy to let properties is likely to weaken, particularly if the UK economy heads into a prolonged recession.
So here’s a headline from the financial times that buy to let landlords under strain from mortgage rate rises and generally we’re now starting to see the turnaround in the market. There’s a headline in mid-December UK house prices fell at the fastest rate in 14 years. 23% declined for November, equivalent to about a 7 000 pound reduction, the average price, according to the Halifax house price index. So much does depend I think, on where and when interest rates peak in the UK, here’s the chart showing the base rate of interest set by the bank of England’s monetary policy committee.
We’ve had nine increases in base rates. Consecutive meetings, currently at 3.5 percent likely to go higher in the early months of 2023. Where will they peak at four percent four and a half percent, maybe five percent? If they do and if they stay relatively high in 2023, their mortgage rates will also stay high and that will be obviously a key factor causing the housing market to experience a recession.
So, yes, we think house prices will go down in 2023. Who knows by how much five percent maybe 10, possibly even more? This is a key measure, of course, of economic activity and it’s one to keep an eye out for as we head into the new year.