What is next for the UK housing market?

Lots has changed in the economy over the past year, and this affects the housing market. Here we explain what’s going on and what is likely to happen next.

What’s been happening?

Probably the most significant event impacting interest rates was the September mini-budget. At least temporarily, financial markets lost confidence in the government’s ability to manage its own finances, pushing up interest rates and reducing the range of mortgage products on offer. Even though things have improved since then, mortgage rates are still much higher than we have seen in recent history, and are likely to stay this way because of inflation.

High inflation means high interest rates, because the Bank of England’s job is to try to reduce inflation from the current 10% to a target of 2%, and the main tool they use is interest rates. Until inflation falls (probably mid-2023) interest rates are likely to go up further.

Finally, we can’t avoid mentioning the cost-of-living crisis. Inflation has a direct and painful impact on just about everyone, so at the same time as the costs of mortgages are going up people’s incomes are being stretched in lots of other ways as well.

The result of all this has been a fall in house prices each month for the four months to December. However, while prices have fallen since the mini-budget, they have still seen year on year growth of 2% comparing December 2022 prices with December 2021. Also while headlines focus on the average house price there is still massive regional variation. For example, in 2022 house prices in York rose by 23.1%, while prices in Leicester fell by 3.6%, and even in Islington, London, they fell by 0.4%.

What might happen to mortgage rates?

It is important to say that no one has a crystal ball when it comes to mortgages! However, with that important caveat in mind there are still economic pointers which give us some direction.

First of all, variable rate mortgages are quite likely to increase further in the months ahead. This is because they are directly influenced by changes in the base rate, and while inflation remains high it is quite possible that there are more base rate rises in the pipeline, from 3.5% now to a possible 4.5% by mid 2023.

The picture for fixed rate mortgages is likely to be less volatile, particularly longer term (5 year) deals, because these are influenced by longer term rates. This makes them generally more stable, and there are already 5-year deals at well below 5%. In the absence of any unforeseen economic shocks the rates on these longer-term fixed deals are less likely to rise, and may even continue to fall in the months ahead.

What should I do?

Although we are definitely navigating a more unfamiliar market than we have seen of late, there are some positives and opportunities that still remain:

• More opportunity for long term investors as house prices fall

• A high demand for rental properties is likely to continue to support high rents

• Better opportunities for buyers in a good position to purchase, due to less competition and lower prices, and probably a more realistic approach by sellers.

Also, while there is likely to be a fall in average house prices (with the usual regional variations), no one is yet predicting that this will be as dramatic as in the 90s or the 2008 financial crisis when prices fell 20% and 15% respectively. Most commentators are talking correction not crash, with prices coming down by 5% - 8% in 2023.

As always, whether now is the right time to buy a house depends on your own personal circumstances, and you need to carefully weigh up the pros and cons before making your decision. These are just some things to consider:

• How much can you afford to pay each month on mortgage payments, and what spending power does that give you?

• Are prices still rising in your local area? While the media talks averages, it’s vital to understand what is happening in the area you want to buy in.

• While average prices may fall this year this may mean people who don’t have to move could hold off on a sale, reducing the availability of houses to buyers

• How much do you have for a deposit – the more you can afford to put down, the less impact the mortgage rate rises will have on you

• Are you likely to move again quickly? While prices may fall in the short term, they are likely to recover from 2025 onwards.

How Heywoods can help you to navigate through the market in 2023!

Established in 1881, and based in the local area for many years Heywoods have a wealth of experience and local knowledge in the Newcastle-under-Lyme area and throughout North Staffordshire, South Cheshire, Shropshire and beyond.

We understand the property market inside and out. Our friendly team are here to support you with our expertise and exceptional customer service. We will help you to understand the local market and give you honest and straightforward advice when it comes to buying, selling and letting. We even have our own inhouse mortgage broker and financial services experts to help you get the right deal for you.