Upward momentum in house prices falling away quickly
House prices have risen 7.2% in the last year, an increase of £17,500 for the average UK property.
The underlying rate of quarterly price inflation has slowed from more than 2% during the summer to just 0.3% in the last 3 months - an annualised growth rate of just 1.4%.
We expect to register quarterly price falls in the first half of 2023, dragging the annual growth rate into negative territory by mid-year.
It's the same pattern across all regions of the UK as weaker demand from higher mortgage rates, cost-of-living pressures and low consumer confidence hits price growth across all markets.
Sellers continue to accept larger discounts to asking prices to achieve sales. The gap has grown to 4% in the last month, from 0% in early October. We expect discounts to widen further in 2023.
However, at this late stage in the year, fewer sellers reduce asking prices as they wait to see what the market holds in January before making any changes to pricing.
The flight to rural and coastal locations runs out of steam
A key trend over the last 2 years has been the search for space. A proportion of buyers have looked to relocate to rural and coastal areas, pushing up demand and house prices more quickly than in other areas.
Some of the largest gains in house prices over the last 2 years have been across Wales, the South West, Norfolk and east Kent.
This trend is reversing and these markets are seeing market conditions cool.
Coastal towns and rural areas in the south of England - such as East Kent, Torquay and Portsmouth - as well as the wider Lake District area (Lancaster postal area) and mid-Wales (Shrewsbury postal area) have all recorded a greater slowdown in buyer interest and new sales over 2022 than other areas.
The initial wave of pent-up demand was brought about by more working from home and a spike in retirement. This looks to have run its course for now, as the coastal and rural areas are offering less value for money and there are fewer discretionary-motivated moves from cost-conscious buyers.
Housing markets in urban areas will fare better in 2023
Buyer interest remains stronger in urban locations where jobs are being created and there are more services.
Family housing in city suburbs and commuter areas has registered strong buyer interest over the last year, while demand in city centres has been weaker as a result of more working from home.
Postal areas including Bradford (BD), Swindon (SN), Coventry (CV), Crewe (CR), Milton Keynes (MK) and Southend (SS) are registering above-average buyer interest in 2022.
All these areas have their own employment base, but they are also close to or have good transport links to larger employment centres like London, Leeds, Manchester and Birmingham.
Continued employment growth will stimulate housing demand over 2023 in these more affordable city regions.
Affordability is the key to the outlook for house prices
Affordability is the primary factor looking ahead to 2023 and beyond, and will be influenced by mortgage rates, household incomes and the actual level of house prices.
The more unaffordable a local market, the more households are priced out, weakening demand and impacting sales volumes and pricing. The opposite is true in more affordable markets where house prices tend to be lower.
Higher mortgage rates increase the income needed to buy and worsen affordability for those buying with a mortgage (7 in 10 sales). The impact is the greatest in high-value areas where mortgages are bigger.
Looking back over the last 5 years, house prices have certainly risen fastest in more affordable markets. The chart shows a clear relationship between house price inflation (2017-2022) and current house prices for every postal area in the UK.
More affordable markets will see lower price falls in 2023
Most local housing markets have recorded house price gains above average earnings growth (+22%) over the last 5 years.
The highest price increases since 2017 have been recorded in the Oldham (OL) postal area (+47%). Other high-growth markets include Newport (NP), Swansea (SA) and Bolton (BL) where house prices are lower. We expect house price growth to slow in these higher-growth markets in 2023.
Our national view is UK house prices falling by 5% next year. But price falls in these more affordable markets are likely to be below average as the hit to buying power from higher mortgage rates will be less than in the high-value markets. This is supported by the evidence of continued above-average demand in more affordable urban areas.
London and its commuter areas have underperformed in price growth
Stretched affordability for buyers in London and the adjacent commuter areas have limited the scope for price increases over the last 5 years, despite ultra-low mortgage rates until mid-2022.
Prices have fallen slightly in Central London (the WC, EC postal areas), since 2017 and are 24% lower in real terms, allowing for consumer price inflation.
Earnings have risen faster than prices since 2017 which is slowly improving affordability, but average prices remain high by national standards and mortgage rates are now higher than last year.
The inner London housing market will rebound soon, but this requires a further improvement in housing affordability. We expect London house prices to register above-average price falls of 5 to 8% in 2023, which will improve affordability alongside our expectation of lower mortgage rates.
A resurgence in employment growth will be the trigger for a turnaround in this underperforming market in the next 1-2 years.
Flats are becoming better value for money
The pricing of flats has also underperformed the rest of the market.
Apartments make up around 1 in 5 homes in the UK, but price inflation for them has lagged behind growth for houses, exacerbated by the search for space and concerns over cladding and leasehold charges.
The chart above tracks the average price of flats and houses since 2002. The average price of a London house is 1.7 times the price of a flat, up from 1.4 times a decade ago. The same is true across the rest of the UK, where the price differential is currently 2.1, the highest for 20 years.
We expect increased demand for flats in 2023 as buyers seek better value for money.
This will be supported by improving sentiment towards flats as the government moves to ensure cladding problems are remediated in most buildings. Only a small proportion of the UK’s apartments are impacted by cladding, giving opportunities for buyers seeking better value for money in 2023.