House prices fell by -0.6% in January, according to Nationwide. This marked the fifth consecutive month of value falls and takes annual growth to January to 1.2%. This matches our expectations that values will fall further in 2023 as affordability remains constrained.

The market is in the midst of a slowdown, as the number of mortgage approvals in December tumbled to 43% below the 2018-19 average for the month, according to the Bank of England. Despite this slowdown in the mortgage market, the number of sales completions for December was still 8.4% above the 2017-19 average for the month. The numbers were bolstered by a pipeline of sales agreed earlier in the year working their way through to completion.

Further downward pressure on prices comes from falling demand relative to supply. More surveyors reported falling new buyer enquiries than new instructions, according to the December RICS survey. New instructions were also down further than new sales agreed in January according to TwentyCI, who also report rising levels of fall throughs and price reductions. A smaller pool of buyers will be better able to push sellers to compromise more on price.

The weakening market is largely a consequence of the challenging mortgage environment, with the number of products available still lower than before the mini-budget. Higher Loan-to-Value (LTV) products have been slower to recover, posing challenges for buyers with small deposits such as First Time Buyers, particularly in the absence of Help to Buy.

Demand will be supported by falling mortgage rates which averaged 5.4% for a 75% LTV 2 year fix in December, according to the Bank of England. This is down from the peak of 6.0% in October, but considerably above the average rate of 1.6% in December 2021. The latest 50 basis point hike to the base rate will have little effect on mortgage rates as most lenders have already priced it in. At 4.0%, this is expected to be near the peak base rate, assuming inflation continues its downward trend. Although mortgage rates are expected to continue falling, they are not expected to return to the pre-covid lows in the foreseeable future. So the step down in the budgets of homebuyers will endure.

Annual house price growth to October was strongest in Torridge in Devon and Hastings, up 19.7% and 18.2% respectively. Small falls were recorded in Aberdeen City, which fell by -2.6%.

UK monthly rental growth sat at 0.9% in December, with rents up 11.5% on an annual basis, according to Zoopla. Rental growth continues to be the strongest in London, up 1.5% in December. It’s followed by the North East, with rents up 1.1% over the month. Rental growth has been the weakest in the South West, up 0.5%.

Rental growth has been generally slowing, after peaking for most regions in October or November last year, with only Scotland seeing consistently accelerating rental growth over the past few months. This slowdown may simply be seasonality (December is almost always weaker than November) and growth may pick up in the new year driven by high levels of demand and limited supply.