Caution Matches Optimism in Froth-Free UK Housing Market

Posted by Knight Frank Newcastle on 6th February 2023 -

You don’t need to hunt too hard for evidence that the housing market is headed for a steep fall.

Mortgage approvals in December fell to their lowest level since 2009, an annual decline in the Nationwide house price index is imminent and the latest RICS survey showed buyer demand has only been weaker three times in the last decade.

Clearly, the long-awaited crash is underway, right?

If you ignored the impact of the mini-Budget and disregarded the anecdotal evidence, it would be a reasonable conclusion.

However, while most of us have moved on from last September’s mini-Budget, the hangover is more prolonged for the UK housing market.

True, the spike in mortgage rates after Kwasi Kwarteng unveiled his economic plan has largely reversed.

But it should be remembered that rates jumped above 6% in the final quarter of 2022 and lenders withdrew hundreds of mortgages from the market. No wonder so many buyers and sellers put their plans on hold until after Christmas.

The last few months are hardly a useful barometer for the future of the UK housing market.  So far this year, it appears these plans are being reactivated as relative economic stability returns under a new government.

The number of new prospective buyers registering in January across the UK was 9% above the five-year average, Knight Frank data shows. Meanwhile, the number of offers accepted was 44% higher and sales instructions rose 6%. The prime London market has also made a strong start to the year.

“We had fewer buyers registering in the final three months of last year because people were still licking their wounds after the mini-Budget,” said Christopher Burton, Knight Frank office head for Dulwich.

“The surge of interest we’ve seen in January is because these buyers have now reactivated their plans. Overall, a large proportion of new buyers are yet to market their own property, indicating they are coming to the market fresh, have accepted where mortgage rates are and need to get on with moving. My best guess for prices in Dulwich this year is flat, although we are still receiving offers over guide prices.”

Could this be simply a short-lived rebound following a period in the deep-freeze in the final three months of 2022?

It’s true that the amount of financial distress in the system will only increase and the impact of higher mortgage rates will slowly rather than suddenly tighten its grip around buyers and sellers.

Furthermore, a cost-of-living squeeze that compounds pre-existing affordability constraints will keep a lid on demand and prices. We think UK prices will decline by 10% over the next two years as buyers recalculate their budgets.

However, you shouldn’t underestimate the motivation levels of a needs-based buyer who has come to terms with the fact that a five-year fixed-rate mortgage is now at its 25-year average (4.3%). And there are many of them out there. It’s the more discretionary non-cash buyers who are hesitating.  The resilience of prices and sales volumes will be put to the test this spring when larger numbers of transactions take place and by which time virtually no five-year fixed-rate mortgages below 3.5% will remain in the system.

For now, the market feels froth-free, and there is optimism and caution in equal measure despite what the data from the aftermath of the mini-Budget is showing.

You can find this original article on Knight Frank website.

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