Housing activity market tracker Q3 2023

When will the housing market bottom out?

Housebuilders, homeowners, investors and funders are still asking the million-dollar question: ‘when will the market bottom out and the fall in house values stabilise?’ 

The Bank of England's decision to maintain interest rates at 5.25% during the last two reviews was good news for the housing market. However, in less positive news for the market, rates are predicted to remain at this level until late 2024 alongside continuing uncertainty over the economy’s recovery time, the stabilisation of inflation and cost of debt and living.

But the industry is braced for a tough 2024, with house values expected to fall further and housebuilders seeing land impairment and house volumes continue to decline and be unpredictable. 

We have now seen prices fall on average by approximately 4% over the last twelve months, despite continued challenge to buyer affordability and access to affordable debt. However, this still represents a modest decline and underlines the scarcity of supply in the market. 

The Southwest has been the weakest performing region, with prices down 6% over the year. In comparison Northern Ireland has been resilient region, experiencing a decline of less than 2%. In the last quarter the average house price in the UK still sits above £260k.  

Land becomes a central concern as HS2 project scrapped

The decision to scrap the HS2 project sent shockwaves across the industry. The housebuilders and investors that strategically procured land along the proposed route will now need to make decisions on what to do with this land. These stakeholders need to ascertain whether residential development is still sort after in these areas or whether new transport infrastructure plans will drive interest in alternative development locations. 

Over the past year, national housebuilders have reduced their volume of plots and revised their targets amidst economic challenges. Dealing with land impairment on their balance sheets, along with increased costs seen in 2021 and 2022, they are grappling with the consequences of having purchased land at its peak price, now unable to generate the required profit margins.

September’s Construction PMI index identified the significant downturn in housing activity with activity plummeting to 38.1, marking the lowest levels since 2009, excluding the initial lockdown months.

The lead time to mobilise new transport and infrastructure projects will span years, not months. The planning of new communities and housing will be further delayed and investor decisions may not be taken for a number of years as we wait for hybrid working practices to fully bed down. We will see a balance taken across establishing new out-of-town developments and the repurposing of obsolete commercial spaces as many local authorities attempt to draw more people to live within city centres.  

The Autumn Statement – incentives crucial 

Political party conference season shone a spotlight on the UK’s major parties. Manifesto promises around housing were prominent at each conference, highlighting its importance to voters. Now, the forthcoming Autumn Statement offers a final opportunity ahead of the next general election for the current Government to deliver key messages on support for first time buyers and the delivery of new sustainable and affordable homes, both which were central to the recommendations from the British Property Federation. 

In October RSM polled professionals within the real estate and construction industry, the majority favoured a reduction in Stamp Duty Land Tax / Devolved Equivalents as the most beneficial tax cut for the sector. 

It remains to be seen what will be announced in the Budget, but the Chancellor’s stance has firmly been that there is currently little scope for tax cuts. 

Over recent years tax costs have effectively increased by 10%. Developers are now faced with an extra 6% in corporation tax and in some instances more than 4% in residential property developer tax. 

With the Government’s previous withdrawal of help-to-buy incentives and the SDLT holiday which stimulated activity, national housebuilders have recently intensified their own incentives, primarily targeting first-time buyers. Despite elevated interest rates squeezing buyer affordability, efforts to stimulate purchases include price cuts, shared ownership incentives, payment holidays and enhanced fixtures. This move has led to reduced gross margins for housebuilders, making any additional schemes or funding specifically for first-time buyers a highly welcome and potentially stimulating measure for the market.

Planning remains key to increasing supply, reform in Scotland through NPF4 has been widely criticised by many in the sector over causing more delays for housing developments. 

The Labour party has laid out its own agenda for planning reform, which also includes proposals to hand more power to local authorities and a pledge of building 1.5 million more affordable first homes over a five-year period. 

The mortgage market 

Mortgage rates remain above 5%. Homeowners are biding their time with re-mortgaging or moving house. First time buyers face the challenging of raising sufficient deposits to attract the best rates while being able to afford their first-time mortgage and families looking for the next move remain reluctant to take on a larger mortgage while rates are at this level. Buyers are not compromising and seem prepared to sit it out until rates drop, and house prices stabilise. As a result this will cause further pent up demand for family homes and a shortage of affordable housing. 

RSM predictions

• House prices will fall up to 7% in 2023, but expect a stabilisation to take place towards the end of 2024 to early 2025. 
• Wage growth will settle at around 7% by the end of 2023, impacting mortgage funds availability.
• We expect interest rates to stabilise at 5.25% until Q3 2024 and inflation to fall to 2.5% by mid-2024. 
• Cash investors are poised and will enter the market as it bottoms out early to mid-2025.
• Management will focus on enhanced technology and the use of AI to create better project efficiency and margins.