Where is the housing market going in 2023 ?


We try to avoid talking shop in this column but recently there’s only been one recurring question everyone’s been asking me – are our house prices going to drop? I realise the subject might seem tone deaf when we’re all faced with many other issues and indeed many would welcome a drop in house prices and rents. But it’s what I do for a living so perhaps against my better judgment I’ll get out my crystal ball.  So as Jeremy Clarkson says on Who Wants to Be a Millionaire – ‘here’s what I think’.

The Truss/Kwarteng shambles revealed again the incredible fragility of our financial systems. Schemes that looked clever were suddenly exposed as risky in more testing conditions. As the worlds most famous investor Warren Buffett says, – its only when the tide goes out that you find out who’s swimming without their trunks on.

The mini budget was a shock to the system and forecasters predicted a house price slump. Some predict one every year (and are occasionally right) but often the housing market defies logic. When we entered the first lockdown in March 2020, the prevailing wisdom then was house prices would crash, but the opposite happened. Nobody figured a pandemic would change working habits and lifestyles and drive many people to move. When it comes to predictions, the only certainty (apart from death and taxes) is uncertainty.

Guesses now range from a house price drop of 5% (Zoopla) up to 30% (Oxford Economics) with most forecasts circling 10%. These are forecasts of average house prices. Some will fall less than others. Lets consider that in local terms.

There’s lots of house price indexes like the Nationwide and the Halifax (which both fell after the mini-budget). Professional property valuers generally use the Land Registry House Price Index (HPI) from which we can extract data on transactions just within Richmond Borough (and split it into property types.) Since lockdown one, the average local property value has gone up 18%, but flats and maisonettes have ‘only’ gone up 11%, – half that of the most sought-after asset – detached houses – which are up 22.5%. So if we did drop back 10%, not all properties might fall the same and overall we’d go back to where our local average price was in July 2021. Difficult of course, but not what you’d call a major slump.

Might we go down less than other areas? Possibly, though don’t think we never see local prices drop. In the 2008- 9 Financial Crisis, Richmond and Kingston property values fell 17 % over 18 months, but in even worse circumstances when nobody could get a mortgage at any rate. On the way out we clawed the whole drop back within a further 18 months. Of course, in a mega crash, like the early 90s, recovery would take far longer. It took us till 1998 before we got back to where prices had been in 1989.  A big difference then was interest rates were determined by the European Exchange Rate Mechanism (ERM) and way too high for a recession. Interest rates now are set by the Bank of England who want to tame inflation but know the UK economy is too weak and indebted to cope with over-excessive rates. And unusually,  the cheapest current fixed rate mortgages are over the longer terms. This says money markets believe interest rates are going to go up and then back down again. Many forecasters believe inflation and interest rates may peak in 2023. What looked a potential Bank base rate well over 6% now looks more like topping around 4%. But this might prove wrong of course, – I noted months back if you’ve lived through previous inflationary periods, you know once that genie is out of the bottle, it’s hard to get it back. On the other hand, events might bring down food and energy prices like say, an outcome in Ukraine, or China re-emerging from its interminable Covid lockdowns. But probably we won’t go back to the abnormally low interest rates of recent years which were the lowest since the Bank of England was founded (in 1694). Its also likely the travelling companion of very low interest rates, – a high ratio of average house price to average income – must also adjust.  Property prices will recalibrate to a new normal. But will they crash? I don’t believe so in the classic sense. It’s more likely to be a slow-moving process.  I think the number of property transactions will drop (- worse news for estate agents than a drop in prices by the way!) Homeowners who want a peak price won’t sell. Homeowners with a good existing mortgage won’t move. We’re already seeing less property come onto the market. So we still have more buyers than sellers, especially for family houses or with an important driver like an address near Grey Court School. The last three weekends we’ve still had competing offers on houses from one viewing day with some over the asking price. Our buyers with mortgages already approved are motivated to buy to keep their rate. And not everyone needs a mortgage – you’d be surprised how many buyers have cash or lots of equity from a previous property. (30% of homeowners now own their home outright). You might also be surprised how many of our buyers have funding or part-funding from outside the UK. In particular families relocating from Hong Kong have picked our area as one of the preferred places to settle in the UK. The fall in the pound also makes UK property attractive to international buyers. One person’s problem is always another’s opportunity.

Mortgage lenders are cautious now,- and causing us problems with down valuations, – but it’s surprising how quickly they alter when they realise they’re not making any money, especially if there’s less cake to slice into. They could also tweak mortgages to cope with higher interest rates – offering them over longer terms, or more interest-only or hybrid products. And never underestimate the willingness of UK governments to subsidise the housing market with another wheeze like stamp duty holidays or help to buy. I don’t just mean Tory governments by the way. At his recent Conference address, Keir Starmer said a Labour Government would increase the ratio of homeowners up to 70% and ‘help millions on to the housing ladder’ and there would be a government mortgage guarantee scheme so people wouldn’t have to save up large deposits. Mmm, -sounds familiar. You could take an alternate view that rents and house prices are high not because there aren’t enough homeowners, but because there aren’t enough homes. Lack of supply has altered the parameters a lot since the 1990s crash and could offset a major correction this time. Public sector housebuilding has now been sparse for the last 40 years and existing stock reduced through right to buy.  From 1945 to 1979, 126,000 council homes were built in an average year. (The most ever built in one year, 219,000, was under a Conservative government in 1953). We don’t build that many homes in total now, but the populations ballooned. The political unpopularity of redressing this suggests we won’t be altering the balance anytime soon so fundamental supply and demand could underpin the value of the properties we do have.

In our local rental market, lack of supply is even more drastic. You would think higher rents can’t be sustained in the face of rising living costs, but the average advertised rent on Rightmove in Greater London is 16% higher than a year ago, the highest rate of growth of any region on record. Our last couple of 2-bedroom flats in Ham (asking £1850 and £2100pcm) both went over their asking price. Rents on family houses are off the scale. This may be a phase but our landlords have been selling up in the face of rising costs and reducing what’s available. First-time buyers might calculate a mortgage even at a higher rate is still cheaper than renting, especially if they’re not paying any stamp duty.

On balance then I’m expecting more of a stagnant period with fewer transactions and lack of supply preventing a major correction. If inflation subsides, mortgage rates may come down again, but not to the lows of recent years.  Possibly property prices may drop more in other areas while ours will flatline for a while, although of course that does mean that while inflation continues, in real terms property prices will actually be dropping. I think this is how the readjustment is likely to play out.  But I could be horribly wrong, we shall see.

Stan Shaw has managed Mervyn Smith since 1994 and is also an RICS Registered Valuer.