Why the gloomy house price predictions for 2023 are wrong
January 25, 2023 9:26 pm
A very interesting article in The Times last week, by Richard Donnell, executive director (research) at Zoopla, which confirms much of what we have been saying over the last few weeks. Yes, prices have levelled off, but we are not facing a similar fall in values to the financial crisis in 2008.
The final weeks of last year were marked by a succession of negative forecasts for the housing market. The consensus was for an 8 to 12 per cent drop in average prices alongside a double-digit decline in sales volumes in 2023. The trebling in mortgage rates over 2022, cost of living pressures, a hit to real incomes and recession are all contributors to the gloomy outlook.
These factors certainly didn’t make for a positive backdrop, but there are a number of reasons why the outcome may be less cataclysmic than the headlines suggest.
Their commentary and analysis fit very well with what we see locally here in Formby, where the housing market has becoming more equity-driven, with less reliance on borrowers maximising leverage to buy homes. They report that half those who bought homes in 2021 used cash or a mortgage less than half the value of the property; less than 1 in 20 new mortgages involved a deposit below 10 per cent.
This is a very different situation to that in the run-up to 2007, when banks loosened credit conditions to support buyers — households bid up the cost of homes, driving a double-digit overvaluation in housing that exacerbated the price falls over the subsequent downturn. Average house prices fell by 12 per cent between 2007 and 2009 as mortgage availability dried up.
The second point is that the mortgage lending market has transformed thanks to regulations introduced in the wake of the global financial crisis. It is much harder for borrowers to overextend themselves — lenders are limited on lending at high loan-income ratios, reducing borrowers’ ability to take on too much debt. In addition, the vast majority of households taking out mortgages have had to prove to their bank that they can afford mortgage rates of 6.5 to 7 per cent, even though they might only be paying 2 per cent or lower.
Mortgage rates for new business are already tumbling. Variable-rate loans are about 4 per cent, while fixed rates are getting closer to 5 per cent — a range that is manageable for homebuyers. First-time buyers looking to purchase a home they rent outside southern England will find their monthly mortgage repayments to be less than the rental costs, even at 5 per cent mortgage rates. However, their challenge remains getting together a deposit that is large enough.
The impact of higher mortgage rates has been overestimated and will not hit the housing market in a uniform way. UK house prices could fall by up to 5 per cent, but the reductions will be concentrated in southeast England, where there is a large equity buffer to absorb price falls. Elsewhere, any price reductions are likely to be modest, and across large parts of the country house prices are likely to be flat over 2023.
Why it’s so hard to predict house prices
The final important point is that the impact of the Covid pandemic is not yet over, and its effects on the housing market will not fade quickly. Working from home is here to stay, meaning that the links between where people live and work will loosen further, enabling homebuyers to look more widely when searching for better value. The spike in retirement has also supported more home moves, often involving households with small or no mortgages, for whom higher borrowing costs have less of an impact on such decisions.
Cost of living pressures and greater awareness of the amount of money needed to run homes will come to the fore this year. They will act as a catalyst for moves and support a million home sales in 2023, or maybe surprise us and drive sales volumes even higher. These motivations to move are more about necessity than aspiration, which has tended to support boom and bust in the housing market.
While there’s reason to be more optimistic about the market than many would have you think, it does come with a sting in the tail. House-price growth will be much lower for longer as the market adjusts to higher mortgage rates and new generations remain less wealthy than their forebears. At best house prices will track income growth over the coming years.
A more stable and less volatile market will ensure that we keep the investment flowing into building more homes and a steady flow of finance into the market to support movers.
Richard Donnell is executive director (research) at Zoopla
The Times – January 15th 2023