The UK housing market is currently in a state of flux. A new report published by The Guardian unveils that the pace of UK house price growth is presently the slowest at this time of the year since the 2008 financial crisis. This emerging trend is attributed to the impact of higher interest rates on the housing market.
How is the UK housing market doing currently?
2023 Was a Year of Decline
According to the Nationwide House Price Index, the UK housing market experienced a downturn in 2023. House prices fell by 1.8% over the course of the year, with the only exceptions being Northern Ireland and Scotland, where prices saw a modest rise. The weakest performing region was East Anglia, witnessing a substantial 5.2% decline in prices.
- December 2023: The monthly index stood at 517.5, with no change from the previous month. The annual change was -1.8%.
- November 2023: The monthly index was 517.8, indicating a slight increase of 0.2% from October. The annual change was -2.0%.
The average price (not seasonally adjusted) in December 2023 was £257,443, showing a marginal decrease from £258,557 in November 2023.
Reflecting on the year-end data, it is evident that the housing market faced challenges, resulting in a cumulative decrease of almost 4.5% compared to the all-time high recorded in late summer 2022.
Market Analysis and Affordability:
Despite rising incomes, the housing market experienced weakness throughout 2023. The total number of transactions was 10% below pre-pandemic levels, with mortgage transactions seeing an even steeper decline of 20%. Higher borrowing costs played a significant role in dampening market activity, with mortgage rates remaining more than three times the record lows observed in 2021.
Although incomes increased, higher mortgage rates impacted affordability. A typical borrower with an average UK income, purchasing a first-time buyer property with a 20% deposit, would face a monthly mortgage payment equivalent to 38% of take-home pay—well above the long-run average of 30%.
Deposit requirements also remained a barrier to entry, with a 20% deposit on a typical first-time buyer home equating to approximately 105% of average annual gross income. While this is an improvement from the all-time high of 116% in 2022, it remains close to the pre-financial crisis level of 108%.
UK Housing Market Forecast for 2024
Looking ahead to 2024, there are some positive signs for potential buyers. Mortgage rates have started to edge down, and investors are optimistic that the Bank of England's rate increases have peaked. This optimism has contributed to a reduction in longer-term interest rates, supporting fixed mortgage rate pricing.
However, a rapid rebound in activity or house prices in 2024 seems unlikely. While cost-of-living pressures are easing and inflation is below the rate of average wage growth, consumer confidence remains weak. Surveyors continue to report subdued levels of new buyer enquiries, and there are still upward risks to interest rates.
The forecast suggests that a combination of solid income growth, slightly lower house prices, and mortgage rates may gradually improve affordability. Despite these potential improvements, housing market activity is expected to remain fairly subdued. If the economy continues to be sluggish and mortgage rates only moderate gradually, house prices are likely to record another small decline or remain broadly flat, ranging from 0% to -2% over the course of 2024.
Regional Analysis: Varied Performance in 2023
Breaking down the regional performance in 2023, Northern Ireland emerged as the best performer, witnessing a 4.5% increase in house prices. Scotland also recorded a modest annual increase of 0.5%. However, East Anglia experienced the most significant decline, with prices down by 5.2% year on year.
Across England, prices were down 2.9% compared with Q4 2022, while Wales saw a 1.9% decline. Northern England experienced a 1.8% year-on-year decrease, with Yorkshire & The Humber being the best-performing region in this area, showing a -0.5% annual change. Meanwhile, southern England saw a 3.4% year-on-year fall, with London being the best-performing southern region, witnessing a 2.4% annual decline.
The regional variations highlight the diverse challenges and opportunities within the UK housing market, contributing to the overall complexity of predicting future trends.
Property Type Dynamics: Trends in 2023 and Beyond
Notably, there was a discernible shift towards smaller, less expensive properties, with transaction volumes for flats holding up better than other property types. One key factor contributing to this trend is the relative affordability of flats.
Affordability for flats has held up better compared to other property types, likely due to their more modest price increases over the pandemic period. A chart illustrates this, revealing that average prices for flats increased by 11.0% since Q1 2020, approximately half the 22.6% increase observed for detached properties over the same period.
While there was a clear distinction in the annual rate of price growth for different property types earlier in the year, the most recent data indicates a convergence in these trends. In 2023, semi-detached properties emerged as the most resilient, recording a 1.8% year-on-year fall in prices. Flats and terraced houses both saw a 2.1% annual decline, reflecting a more balanced market performance. In contrast, detached properties were the weakest performers, experiencing a 2.7% decline in prices over the year.
This convergence suggests a leveling of the playing field across various property types, with affordability and market dynamics playing pivotal roles. Buyers may find a more balanced market, with different property types exhibiting comparable price trends. However, the nuances within each property category underline the importance of understanding specific factors influencing their performance.
Key Takeaways and Future Considerations
As the UK housing market continues to evolve, buyers, sellers, and industry stakeholders should consider several key takeaways:
- Shift towards Affordability: The preference for smaller, more affordable properties reflects the ongoing impact of economic factors on buyer behavior.
- Property Type Dynamics: The convergence in the annual rate of price growth across property types signals a more balanced market, but nuances exist within each category.
- Semi-Detached Resilience: Semi-detached properties demonstrated resilience in 2023, experiencing a more modest decline compared to other property types.
- Market Complexity: The intricate interplay of factors such as affordability, regional variations, and economic indicators contributes to the complexity of the housing market.
As stakeholders navigate the ever-changing landscape, staying informed about these trends and considerations is crucial for making informed decisions. Whether buying, selling, or investing, a nuanced understanding of property type dynamics and broader market trends will be instrumental in navigating the UK housing market in the coming years.