It’s fair to say that from both an economic and political perspective it’s been a tumultuous couple of years. This has made forecasting the outlook for the mainstream UK housing market challenging. So before we look at what we think happens next, it is worth spending a little time looking at what the past 12 months have taught us.

Forecasting under cloudy skies: the outlook 12 months ago

Last November we forecast that mainstream prices would fall -10% in 2023 and that transactions would struggle to rise above 900,000. We did so against the backdrop of a sharp rise in mortgage costs following a calamitous mini budget, as the shortest serving prime minister in history lost a longevity contest to a lettuce.

At that time we were forecasting a fairly hefty, though not cataclysmic, downpour in the housing market. This was in expectation that high interest rates would heavily impact the buying power of those in the market.

But we also expected significant lender forbearance and a relatively modest increase in unemployment to limit the number of forced sales. This would mitigate the potential price falls in a low transaction market weighted towards cash buyers.

Whither our weather predictions – how we did last year

The initial impact on prices was more immediate than we thought, with mainstream prices falling by -2.6% in the last three months of 2022, as lenders struggled to price fixed rate mortgages.

But the initial shock of the mini budget wound out of the system during the first half of 2023 with uncertainty decreasing and mortgage lenders reducing their margin over the base rate. The levels of price falls were therefore contained, despite the Bank of England continuing to raise rates in the face of stickier-than-expected inflation.

Despite a secondary period of turbulence in the mortgage markets during the early summer, the storm clouds hanging over the UK housing market haven’t proved quite as threatening as we feared in 2023. 

According to Nationwide, mainstream prices fell by -2.8% over the course of the first 9 months of 2023. The current rate of falls means we expect that by the end of 2023, mainstream values will be down by -4% on an annual basis and by -7% since September 2022. At the same time, TwentyCi data shows that agreed sales net of fall throughs have been -13% below the 2017-19 average so far this year. This activity continues to be facilitated by a 22% rise in price changes over the same period.

Sheltering from a downpour – factors that have shielded the housing markets in 2023

Several important trends have enabled the resilience seen in the market over the last year. Firstly, inflation has taken some of the strain, meaning relatively modest nominal price falls have translated into a much more significant adjustment in real terms. Secondly, stronger than expected wage growth has cushioned some of the impact of higher mortgage rates.

Mortgage arrears of owner occupiers have been limited by the shift since the Global Financial Crisis to fixed-rate, capital-repayment mortgages issued under strict affordability assessments, rather than variable rate lending. Additionally, those homeowners for whom this “regulatory raincoat” has proved insufficient have been offered further shelter. Those struggling to meet a steep increase in housing costs at the point of re-mortgage have been able to extend their mortgage terms or switch to interest only repayments without affecting their credit score.

Dodging the showers: cash buyers and those less reliant on debt

As predicted, activity has been supported by equity rich buyers, who are less affected by mortgage rates. Appetite from mortgaged buyers has dropped, with those who remain in the market having to adapt to a higher rate environment.

First time buyers have undoubtedly become more reliant on the bank of Mum and Dad. While homeowning has become much more expensive, their continued resolve to get on the housing ladder has also been fuelled by the trials and tribulations of renting. These challenges have become even more pronounced, as levels of available rental stock have been in short supply and annual rental growth has hit double digit territory, and remained there for an uncomfortably long period.

Those already on the ladder have had an equity cushion to fall back on given the burst of price growth seen in the wake of the pandemic. But often they have still had to extend mortgage terms to combat higher mortgage interest costs. The average mortgage term for home movers has risen to 23 years in June 2023, up from a pre-pandemic average of around 20 years. For first time buyers, the average term length has been over 30 years since September 2022. 

Wet, wet, wet: for buy-to-let investment

That option has not been available to mortgaged buy-to-let investors who typically hold interest only mortgages. Their finances have come under serious pressure, especially where they have held their investments in their personal name and so do not benefit from full tax relief on their mortgage costs. Buying activity has fallen dramatically, with buy-to-let lending in the second quarter of 2023 some 60% down on the previous year. 

But perhaps more pertinently, landlords deciding to exit the sector could be the source of an increase in stock brought to the sales market. Despite the recent decision to shelve proposals to tighten minimum energy efficiency requirements for let property, the changes from the Renters Reform Bill are still making their way through parliament, with the potential to prompt more landlords to exit the sector.

The outlook: moderate rain giving way to sunny intervals?

With 2-year fixed rate mortgages costing upwards of 5%, the RICS survey still showing negative sentiment for both new buyer enquiries and new stock coming to the market, and asking prices of unsold homes still regularly being cut, prices are likely to continue to ease back in 2024. However, our forecast for mainstream price falls of -3.0% next year is less significant than those anticipated for 2023. 

With inflation continuing its downward path and the prospect that interest rates will start to gradually be reduced in the second half of next year, we are also able to look towards a return of modest price growth in the second half of 2024. You can read more about the longer term outlook in the following article, which explains why we think total growth will be in the order of 18% over the next five years; despite the prospect of further price adjustments next year.