Economic headwinds, already strong in 2022, are gathering pace.
After stagnating over the past 12 months, it is widely expected that the UK economy will contract next year.
Household budgets are already under intense pressure as a result of income growth failing to keep pace with the rising cost of living and tighter financial conditions.
The main factor that would help achieve a relatively soft landing is if forced selling can be avoided.
There will not be much respite in 2023, with inflation set to remain well above the 2 per cent target (and above the average rate of wage growth), the bank rate being raised by another percentage point (if market pricing proves correct) and unemployment expected to rise as the economy shrinks.
Momentum is also important in shaping housing market dynamics but, after retaining a surprising amount through the first nine months of 2022, activity came to a screeching halt in late September following a mortgage interest rates surge in the wake of the "mini" Budget.
Indeed, the number of mortgage applications fell towards the lows seen at the start of the pandemic, although this has yet to fully manifest itself in the Bank of England’s data on mortgage approvals.
There has been little sign of a rebound as yet, even though financial market conditions have stabilised.
Then why isn’t a severe housing market slump the most likely outcome?
The current weakness in mortgage applications may, in part, represent an early seasonal slowdown.
With the chaotic backdrop and elevated mortgage rates prevailing in recent months, it would not be surprising if potential buyers have opted to wait until the New Year to see how mortgage rates evolve before deciding to step into the market.
The affordability position for buyers is also likely to improve – albeit modestly.
Longer-term interest rates that underpin mortgage pricing are already below the levels prevailing before the fiscal statement and may moderate further, especially if market expectations for a peak bank rate of 4.5 per cent prove overly aggressive, as seems likely, given the headwinds facing the economy.
If true, this will feed through to mortgage rates and help improve the affordability position for potential buyers, as will solid rates of nominal income growth (with wage growth currently running at about 7 per cent annual pace in the private sector), especially if combined with weak or negative house price growth.