The UK’s housing markets remained exceptionally strong throughout the first nine months of 2022, both in terms of activity and pricing.
From the first lockdown in March 2020 to September 2022, house price growth totalled 23 per cent, largely driven by the pandemic-induced 'race for space', the low interest rate environment and, to some extent, the stamp duty holiday.
But the mood changed in the autumn when it became clear that the Bank of England would need to raise interest rates more fiercely than previously anticipated to tackle high levels of inflation.
This was exacerbated by the financial turmoil following September’s "mini"-Budget, but the abrupt change in the interest rate environment has been the real catalyst for the recent change in housing market conditions.
Although inflation likely peaked in October at 11 per cent, it is not expected to fall back in a hurry. Current forecasts are that it will still top 4 per cent at the end of 2023 and not return to its 2 per cent target until mid-2024.
Mortgage rates have also come down from their peak in October but are still far higher than they were last year and before the pandemic.
As a result, house prices fell for the fourth consecutive month in December, according to the Nationwide house price index, down by 0.1 per cent, which leaves them 2.4 per cent lower than where they were in September.
The Savills research team’s view is that these price falls will continue, with the average UK house price expected to fall 10 per cent by the end of 2023.
There will of course be some variation across the country. Markets where affordability is most stretched, such as London and the South East of England, are expected to see average values fall by slightly more than the national average, while more affordable, lower value markets in the Midlands and north of England are expected to hold up more strongly.
On the assumption interest rates ease back gradually from the middle of 2024, values should begin to recover. Our forecasts, published in November 2022, anticipate that the average UK house price will rise by 18 per cent between 2024 and 2027, equating to net 6.2 per cent growth over the next five years.
How does this compare to previous downturns?
So far, so sobering. But there are several factors that should insulate the market from the risk of a bigger downturn, such as that seen after the global financial crisis.
We know that a greater proportion of buyers in recent years have taken out fixed rate mortgages, with many opting for longer-term fixes at historically low rates. This will help insulate them until rates normalise, assuming they have the cushion of time before their fixed term expires.
Borrowers coming off of a fixed rate deal will have had their affordability stress tested at 3 per cent, up until August 2022, meaning the shock to their finances may not be wholly unmanageable, albeit it will undoubtedly be uncomfortable for some, particularly given the prevailing cost of living increases.