Market forecast: Economic flat line rather than deep depression?

Tue 29 Nov 2022

Simon Hollands,

The path for the property market rarely runs smooth. The former Prime Minister’s ill-thought mini budget in September had a catastrophic impact in the financial markets which took its inevitable toll on interest rates. The pound plummeted in value and, according to recent market research, consumer confidence is weaker today than at any time since records began in the 1970s.

The UK economy is now – effectively – in recession and many economic analysts are predicting that this could be the case for the whole of 2023, just don’t mention Brexit. It is, though, widely expected that the economy will ‘flat line’ rather than suffer a deep depression.

Throw in to the mix high energy prices and an inflation rate not seen for 40 years and the outlook is looking pretty bleak. The winter months will certainly bring much hardship for many.

For these reasons, trying to put a gloss on the short term prospects for the housing market is inappropriate. But what do our esteemed economists say?

The expectation is that the Bank of England base rate will peak at 4%; at the time of writing it currently stands at 3%. Mortgage lenders reacted very negatively immediately following Truss and Kwarteng’s disastrous budget, removing some products completely or raising interest rates to deliberately unattractive levels. The dust appears to already be settling on this ‘knee jerk’ reaction. It is widely expected that the lenders will become more enthusiastic to lend in the New Year as, more recently, the markets have been calmed and mortgage rates are beginning to fall.

The current 11.1% inflation rate is thought to be close to its’ expected peak and is likely to fall steadily next year. Many predict that it will be around 5% by the end of 2023 - still high in comparison with recent rates.

Affordability is a significant factor in assessing where property values will go. The steady rise in property prices has been heavily influenced by low interest rates. The average property sale price to earnings ratio has been very high for some time although servicing a mortgage has been more affordable in the last decade than in any post-war period. With mortgages now becoming more expensive, lenders will factor in the higher interest rates when calculating what is affordable for buyers. This is also likely to put downward pressure on prices.

So what is the outlook? David Smith – Economics Editor of the Sunday Times – believes that the housing market will suffer a ‘slowdown’ rather than a ‘crash’. His view is that there is likely to be a small ‘correction’ in values – possibly 5%. In its recent assessment of the new Chancellor’s autumn statement, the Office for Budget Responsibility takes a more pessimistic view and suggests a 9% fall.

Putting this into context and, assuming the worst scenario, property values in the local area will only fall back to where they were at the beginning of this year. Bedford has seen a healthy rise in values since the market sparked back into life following the first Covid lockdown in March 2020. Much was responsible for this – a temporary stamp duty holiday helped – but, perhaps, most significantly was a change in working practices. Many found themselves working from home with much less emphasis on a daily commute. While Bedford has always been popular with commuters, the appeal strengthened almost overnight. London buyers found the town significantly more affordable and this appeal is unlikely to diminish any time soon.

It is widely expected that the volume of transactions will reduce. A number of recent surveys report that many potential home movers considering a move in 2023 are now deferring a decision for twelve months or more. So, the supply and demand equation then comes into play. A reduction in the number of committed buyers is balanced by fewer available properties and prices hold up.

Whatever lies ahead - if you’re considering a sale - informed and up to date advice is essential. Call or email Rob Smith or I and we’ll do our best to help.

Simon Hollands
simonh@hollandssmith.co.uk