Residential Property: Spring Update

The squeeze on household incomes from the rising cost of living, together with the continued rise in interest rates, which increased once more in March to 4.25%, has slowed the housing market at the start of 2023, particularly compared with the rapid growth of recent years.

As 2023 progresses, the housing market will continue to be impacted by the wider economic environment and, as buyers and sellers remain cautious, we expect there will be a reduction in both housing supply and demand overall, with house prices forecast to fall around 8% over the course of the year.

Such a drop would mean the cost of the average property could return to April 2021 prices – still significantly above pre-pandemic levels.

House prices trends

In January, Halifax reported that there was some stability in UK house prices with the average house price remaining largely unchanged at £281,684, rising by 1.1% to £285,476 in February.

This followed a series of significant monthly falls at the end of last year (-1.3% in December and -2.4% in November).

Alongside this, the pace of annual house price growth has stabilised back to the +2.1% rate seen in December 2022.

The average house price is now around £8,516 (-2.9%) below its peak in August last year, though it remains nearly £9,000 higher than in January 2022 (£276,483).

Reservations and sales

Several major residential housebuilders reported a decline in new home sales and reservations, and an increase in cancellation rates in the second half of last year.

This continued into 2023, with the January 2023 RICS Residential Market Survey results show metrics on buyer enquiries, agreed sales and new instructions remain negative, with HMRC monthly property transaction data showing the number of UK home sales decreasing in January 2023.

Bellway Homes indicated that they saw a fall in new house reservations of 12.40% to just 191 a week over the period from 1 August 2022 to October 2022, this compares with 218 in the same period in 2021.

This fell further towards the end of 2022 with reservation rates down 60%, however, rates are now beginning to rise in what Bellway call a seasonal pick-up and some easing of affordability pressures.

Barratt Homes also stated that its private sales per site in the period since the start of October fell 47% on the previous year.

Meanwhile, Taylor Wimpey reported that the rate of net sales per week fell to 0.51 in the second half of last year compared with 0.91 in the same period in 2021.

Over the same period, the cancellation rates for homes rose to 24% from 14% a year earlier, with higher mortgage rates and heightened level of economic uncertainty major factors.

It is hoped that, as cost of living pressures ease, that the market will slowly improve into 2023.

House building

The Building Cost Information Service (BCIS) predicts that housebuilding will fall 20% in 2023, but will recover slightly in 2024 and 2025, before stronger growth returns.

The sentiment is shared by the Home Builders Federation who, following research, expect housebuilding to fall to its lowest level since the second world war, with Taylor Wimpey and Persimmon both confirming they will reduce the number of houses they build in 2023 by a third.

This will impact output which is expected to fall by 15.5% in 2023, before single digit growth returns in 2025, with contractors focusing on building out existing developments first.

Land market hiatus

Looking at residential development land, Savills reported a significant slowdown in transactions in Q4 2022, with 10% fewer development sites sold compared to the same period in 2021.

Economic uncertainty, increased costs and slower sales rates have paused many land sales both regionally and in London markets.

Although there are fewer land transactions, evidence indicates that development land values have started to fall as developer purchasers build a greater degree of risk into their land builds.

Planning concerns

The Home Builders Federation (HBF) has warned that the changes to England’s national planning policy framework (NPPF) and what developers say is over-strict enforcement of environmental regulations, could result in a collapse in the supply of new houses, with the government meeting less than half its annual target.

This follows several years of housing supply spurred by the adoption of the NPPF, designed to stop councils blocking large numbers of new developments, which doubled housing supply between 2012 and 2019.

However, the government has since u-turned on this approach, as our planning team recently discussed.

Economic outlook

As the war in Ukraine surpasses the one-year mark, the conflict has almost certainly had an negative impact on the residential property market, particularly in London where there is significant Russian residential investment and sanctions have imposed.

Alongside this, oil and gas prices have continued to increase, and a price increase in these commodities will continue to contribute towards rising inflation, which in turn will continue to affect potential buyers, who will face higher mortgage rates.

With this in mind, we may see more volatility in the residential market as the year goes on, with ongoing macro-economic factors such as the war in Ukraine, the cost-of-living crisis and the continued challenge of rising inflation rates taking their toll.

We have seen the residential market undergo a change in sentiment overnight before, particularly after a period of sustained growth. In the light of this, the Bank should adopt elevated levels of caution in exercising prudent lending criteria.

This is particularly true of those taking on second charge appointments, as Registered Receiver, Russell Miller, discussed recently.

To find out about our residential property constulancy services or to discuss your needs further, don’t hesitate to get in touch.