Housing activity market tracker Q2 2023

Housing prices show resilience in turbulent market

With house prices holding for another quarter, interest rates rising a further 25 base points and mortgage affordability continuing to be a challenge, the housing market is braced to face a turbulent year.

Despite the economic challenges, house prices nudged up in Q2, with small percentage increases across the UK. However, compared to Q2 last year, house prices have declined by over 3% on average. London and East Anglia have seen the sharpest falls at nearly 5%, while Northern Ireland bucks the trend as the only region not to experience a contraction in house prices in the last 12 months. 

House prices are expected to start to fall over coming months. The factors contributing to house price resilience up to now have included demand for affordable housing, wage growth running at 7% and a fall in supply. But the combination of interest rates, materials, labour and supply has affected the housebuilding sector. Statistics for England showed 8% less housing completions in Q1 2023 compared to the previous year and 12% less starts and the housebuilders prepare for a reduction in volumes in 2023 and 2024. 

‘Builders not blockers’ – Labour home in on a plan

With a general election on the horizon, the spotlight turns to Government to address the housing stock shortage and provide support packages to help first time buyers and those trapped on the housing ladder.

The Labour party has outlined a housing plan that prioritises increased home ownership, aiming for 70% home ownership, with social housing as the second largest tenure. In order to achieve this goal Labour proposes planning reforms, streamlining the process of building on green belt areas and granting local authorities the authority to acquire land at reduced costs.

Rishi Sunak and the Government housing ministers have not outlined any major reforms in mortgage guarantee or help to buy schemes. With a significant slowdown of housing transactions anticipated, coupled with affordability challenges and unachievable deposits, the Government will need to consider incentives to stimulate the market, in particular for first time buyers. 

With the forecast reduction in housing volumes, the housebuilders have pulled back new build volumes, with some sites being mothballed completely in Q3 and Q4 of 2023 or partial phase builds being agreed to match the fall in demand. 

With strategic land prices peaking, housebuilders now face the prospect of carrying land banks for an extended time, which are subject to impairment. Coupled with higher levels of buyer incentives and a fall in house prices, profits are set to decline in the industry.

House sales volumes in the UK 

Senior living – a decade of decline

In May, a Government appointed taskforce was tasked with recommending how the housing market can accommodate the needs of the elderly population now and in the future. Currently, the UK has only 602,000 units of senior housing, and an average of just 2,617 retirement units have been built each year over the past decade. Delivering housing for the elderly will take pressure off the NHS and release an estimated 628,000 family homes for re-sale, a report by the BPF has highlighted.

The future actions from this demographic in the housing market will have far reaching consequences for decades ahead. Over 80% of housing wealth in the UK is held by those over 50. Grandparents, alongside parents, are now a source of funding for deposits for first time buyers, utilising pension funds, trusts and the gift of properties to maximise tax reliefs while assisting family members to get on the property ladder. 

Modular build: can it really bridge the supply and demand gap?

Modular construction may be on the cusp of gaining traction as a potential game-changer. But, it has, and continues, to see challenge around production line efficiency and the resistance to step away from traditional build methods. Goldman Sachs have backed Europe's largest factory, based in Corby with the capacity to deliver 4,000 homes a year. Unlike European counterparts Germany and Sweden, modular has been sluggish to take off in the UK. For many, traditional builders account for only a small proportion of their units. Many modular businesses have faced the challenge of sustaining adequate volume and manufacturing efficiencies and with a downturn in market demand have struggled to react to volume reductions, seeing some significant insolvencies in the industry in recent months.

There is still a place for modular and offsite solutions which, with reduced lead times, create faster construction and reduce carbon emissions. Modular factories also offer a fixed location for workers and the opportunity to automate parts of the construction stages. This will undoubtedly assist in attracting talent into the workforce.

The opportunity to incorporate modular into existing buildings has resulted in an increase in activity of investors collaborating with developers and construction businesses to design and enhance buildings.

Affordable housing’s perfect storm 

The affordable and social housing sector has borne the full force of economic challenges, severely impacting build completions and detrimentally impacting home ownership targets. Housing associations are grappling with dwindling reserves as they confront retrofit issues like Energy Performance Certificate (EPC) compliance, damp, mould and cladding concerns. With grant funding less available and higher interest rates, RSM’s latest health of the social housing sector report highlighted that housing associations are forecasting building significantly less housing over the next three years.

Mortgage rates triggering a painful period of adjustment

Rates have shown signs of stabilising and the markets have factored in interest rates of 6%, but with the average fixed term mortgage rate around 6%, for many these rates are unaffordable and this has resulted in a fall in mortgage applications and a cooling in the housing market, leading to what will be a period of house price adjustment during the remainder of 2023. Rightmove reported in July that asking prices had fallen by 0.2% for the month. 

While we have seen a degree of resilience, consequences are severe for those affected, mortgage payments for some could increase by 50%. Those with 25+ years, re-mortgaging now or with fixed terms coming up will take the brunt of the pain, with many defaulting to variable and stepping away from fixed term due to the expectation that rates will fall in coming years. 

Many interest only borrowers also face tough financial challenges ahead as they come off fixed term deals, facing up to 5% increase in rates, and in some cases the restriction on term. The interest only market up for renewals in the next 3 years amounts to 25% of the total mortgages coming up for renewal. The restriction on interest only mortgages and rates offered by the market is likely to further exacerbate the fall in house prices. 

Additional safeguards are in place to protect against mortgage defaults, with banking regulations now providing greater flexibility in terms of forbearance options. One area gaining attention is the mortgage term, as there has been a notable rise in new lending agreements spanning longer than 35 years. This figure has surged from 5% in 2022 to 11% in 2023.

RSM Predictions

• We will see a fall in house prices of up to 7% in 2023, but we expect a stabilisation to take place towards the end of 2024. 
• Wage growth will settle at around 4% by the end of 2023, impacting further mortgage funds availability.
• Interest rates will peak at between 5.5% and 5.75% by the end of the year, where we expect them to level out before falling late 2024.
• Cash investors are poised and will enter the market as it bottoms out mid-2024.
• Housebuilders will increase incentives on new homes to stimulate the marketplace.
• Landbank valuations will see further impairment over the next 12 months.