Housing activity market tracker Q1 2023

High interest rates and falling house prices continue to suppress house sales, but the market remains optimistic, Q4 of 2023 will see an increase in demand.

The roof won’t lift off but signs the housing market will stabilise in 2023

The uncertainty around interest rates and house prices continued to reduce demand for new homes in Q1 of 2023. With the building breaks put on in 2022, questions remain around when demand will return and the long-term impact on housing targets. 

With housing sales volumes and valuations seeing a further and more significant fall in Q1 of 2023, investors are keeping a keen eye on when the market will bottom out and when opportunities to expand buy to let and renovation projects appear to capitalise on the market bouncing back. 

With interest rates now at the highest they have been in decades at 4.5%, the market continues to grapple with the cost of mortgage renewals as fixed terms come to an end and families struggle with the energy cost increases seen in 2022. 

But, whilst the market faces challenges around cost of debt and energy, the future looks bright. The stabilisation of interest rates and energy prices will help to create stimulation in demand. This, coupled with low house prices and increased investor activity, could see demand levels surge in late 2023 and into early 2024.

Alongside these factors, a shortage in rental properties and spike in rental prices will stimulate both investor activity and tenants looking to move onto the ownership ladder. 

National and regional average house price

Average house prices fell across all regions in Q1 of 2023, with an average fall of 2.6% across the UK’s regions. London and the South in particular have seen the greatest fall in house prices, where buyer affordability and re-locations has had an impact on activity. While the 6 month period to 31 March has seen a fall in property prices, house prices have seen an unprecedent increase in value over the last 3 years with most areas experience growth of around 20%. New buyer enquiries slowly ticked up ahead of the traditional busier spring period, this was also highlighted in the latest UK Construction PMI index where Housing Activity and Future Activity indexes increased.  

Energy ratings and regulation impact house prices and additional burden on the seller and landlord

The Government’s proposal for all new rental properties to have a minimum EPC rating of C by 2025 continues to place pressure on landlords to invest in energy initiatives to meet regulation. Private residences are also now promoting their energy efficiency with premiums being attached to property valuations with a greener footprint.

However, barriers still exist to improve older stock. An estimated average cost of £10,000 is required to make the necessary improvements. As a consequence of this high cost smaller landlords are exiting the letting market and putting properties up for sale. The cost of this investment has, and will continue to, drive rent prices up. The British Property Federation (BPF) have called on the Government to zero rate VAT on the repair of residential buildings as a measure to help with the challenge. 

80% of the homes we will live in in 2050 have already been built. It remains to be seen whether the ambitious government EPC target will be met.  

House sales volumes in the UK 

Since the pandemic, there has been a significant fluctuation in volume of transactions, largely kick started by the stamp duty holiday that came into effect at the end of September 2022. This incentive sparked a huge amount of activity from buyers, and with investors seizing the opportunity to increase portfolio stocks inflating demand and resulting in unprecedented levels of sales. 

Q1 of this year saw a sharp decrease in sales volumes, largely attributed to concerns around the cost of living crisis and access to affordable mortgage products. For first-time buyers the increased mortgage interest rates and the moderate a fall in house prices resulted in many putting plans on hold while they wait for the market to stabilise. 

In March Savills reported that the number of transactions accounted for by mortgaged buyers had dropped by 13%. This group now makes up around 25% of the market. 

Government support needed across tax, planning and labour

The stamp duty cuts announced in the Autumn mini budget raised the band on the purchase of a property from £125k to £250k, and was one of the few measures that wasn’t subject to a U-turn from the new leadership. The increase of the stamp duty band was strategically targeted at helping first time buyers get on the ladder, but also at assisting families to move up the ladder. 

In response to a consultation by the Department for Levelling Up, Housing and Communities, the industry has been broadly supportive of a proposal to significantly increase planning fees on the condition the system improves, something desperately needed to facilitate the building of the new homes needed. This overhaul looks at the demographical demand for housing and re-assesses previous local housing plans, of which many are several years out of date. Further action and improvements are required at local level to ensure affordable homes, along with education and health care needs, are considered when housing targets are set and monitored. 

Employment numbers in the construction industry have dropped by 11% over the last three years.  Changes to immigration rules to help attract migrant workers to key trades will help meet housebuilding targets in the future. However, there are other challenges to address, such as the ageing workforce, adopting new technology and lack of skills in the sector. In order to manage these the sector needs the Government on board. 

Bidding wars…in the rental market

The number of homes occupied by private renters in the UK doubled between 2000 and 2017, however the curve has flattened. Demand and lack of supply has sent costs in the rental market soaring. Zoopla have reported rents as a percentage of earnings now at a ten-year high in all regions except London. Figures that rents have increased by 10% in Q1 2023 over the previous 12 months apply to new lettings, the figure is halved for existing tenants increases. 

A report was published assessing the effectiveness of Scotland’s rent freeze and impacts. Amongst the conclusions, it stated that political risk is the main factor behind Scotland’s relatively low delivery of Build to Rent (a solution to address lack of supply) and that investor interest had been diminished since the emergency rent legislation was introduced.  

Mortgage approvals

According to Moneyfacts, over 5,000 mortgage options were available in April, the most for 11 months. Banks doubled down in October at a time when uncertainty was at its peak, however as rates have eased off, and with a more certain market, stress test levels have been less vigorous.

This year 57% of UK mortgages will be up for renewal, with the majority taking place in Q2. With most mortgages currently agreed at a fixed rate, borrowers have been protected and many homeowners face a significant increase in mortgage re-payments and some difficult decisions. 

The UK economy has been resilient, RSM Economist Tom Pugh predicts a ‘slowcession’ is more likely than a recession. Although there is a drag on growth in the economy, a strong labour market, reducing inflation and cost prices should ease some of the burden from consumers and homeowners this year. 

With the BoE having increased interest rates by a further 25 basis points to 4.5%, mortgage volumes are likely to continue to fall as homeowners remain cautious over taking on additional fixed debt at higher levels. 

To address a fall in demand, in the Q1 of 2023 we have seen lenders reduce rates and extend terms to attract new customers and secure renewals of term mortgages coming to an end. A fall in rates of 0.5-1% has been seen in both the 95% LTV and 75% LTV rates. 

We have also seen new products launched to the market with 0% deposits, Skipton Building Society is the first lender to launch this product since the demise in 2008.  Many first-time buyers pass the affordability test but will never be in a position to save the deposit required to get on the property ladder, this product enables many renters and first-time buyers to achieve ownership but comes with a caution warning. 

With house prices falling and 100% mortgage coming back to the marketplace, negative equity is a concern for any homeowner and fixed terms should be considered when entering into new mortgages to allow for capital growth over a longer-term period before renewals are due. 

While this product will stimulate the housing market and is much needed home buyers should consider the impact of negative equity in the short term. 

As energy prices stabilise, further childcare support products are offered, property values settle and mortgage rates fall, confidence will return to the housing market and we will see a further uptick in mortgage applications and demand in housing in 2024.  

RSM Predictions

• House prices will continue to fall in 2023 and into quarter two of 2024 by 5% annually before stabilising.
• Interest rates will peak at 4.75% this year.
• Mortgage lenders will look to offer more fixed rate mortgages as interest rates stabilise in Q4 of 2023.
• A forecast fall in energy prices in the last quarter of 2023 will boost household spend and stimulate house sale volumes.
• Average rental prices will raise by 6.5% during 2023 with stocks contracting over the next 24 months.
• Company insolvencies will remain well above pre pandemic levels for at least the next 6 months, but a peak is no longer forecast in the summer months.