The State of the Housing Market 2023

The housing market is the cornerstone of the British economy, for reasons both good and bad.

Millions of young people in this country aspire to stable jobs and house ownership. However, house prices seem to be an escalator that never ends.

We’re in a unique economic moment in the UK:

• A slowdown in economic productivity over the past decade
• A likely recession
• Increasing interest rates after more than a decade of almost 0% rates
• Rising economic inactivity but very low unemployment
• Not enough houses being built in proportion to the rise in population

All these factors and more affect the ever-buoyant average house price. No one must invest in stocks or crypto, but everyone must live somewhere and therefore buy a house or pay for housing.

For this reason housing market prices and data generate the most interest and affect us all, whether you want to buy or have already bought or even rent.

Let’s first take a look at how to understand housing data, and then look at the current state of the housing market and where it’s headed.

Read on for a deep dive on the current state of the housing market.

How to read housing market data

Go to any newspaper site and you’ll see a few stories on the housing market every week.

One headline declares monthly prices have increased and another says year-on-year prices have increased. Another article pools opinion from industry pundits giving their latest predictions, while another piece talks about the dire plight of first-time buyers.

All these articles and pieces talk about prices in so many ways it can be dazzling.

The reason disparate figures circulate is because these stories are based on different indices that measure slightly different aspects of the housing market.

So, the key to understanding the housing market is being able to read the different datasets and indices.

House price data and indices: the basics

Most of the media focus their attention on specific indices:

How to use each index

An important factor to consider when trying to read housing market data is to see how often the data in each index is published:

We can then categorise the indices into three categories based on what the data is based on:

• House sales: UK House Price Index and LSL Acadata
• Mortgage approvals: Nationwide and Halifax
• Property listing: Rightmove

Let’s explore the advantages and disadvantages of each.

House sale indices

These indices offer the most comprehensive data on house prices in the UK.

The UK House Price Index in particular counts the registration of all sales within the UK. The index even allows you to zoom in to local authorities and cities to see house prices at a more local level.

The UK House Price Index is the most authoritative index and is used by the Bank of England to measure house price inflation.

The drawback of these indices, though, is the time lag of as much as two months. So, while the index is good to get a deep look into the market, for people looking for the most up to date prices to buy or sell, it may not be as useful.

The LSL index uses Land Registry data and adds its own forecasting model to estimate prices for the current month. Hence, it is not necessarily a ‘record’ of actual prices for the latest month.

Mortgage approval indices

Nationwide and Halifax use their own mortgage approval data, so they are not as comprehensive as the house sale based indices.

They also don’t include pure cash sales because of that, which make up around 30% of sales.

They use different methodologies and data, so their findings are different.

Of course, the biggest advantage of these indices is that they have hardly any lag and are very timely. This can be useful for people that need an up-to-date picture of the housing market.

Property listing indices

Rightmove acquires its data from the properties listed on its site.

Whatever price the estate agent lists a property at, that price forms part of the data of the index.

Of course, the disadvantage of this is that the sample size only covers Rightmove’s listings, and a seller won’t necessarily receive the asking price listed so the figures aren’t exact.

The biggest benefit of the Rightmove index is that it gives the timeliest data which can be important for people that need to keep their finger on the pulse of the market.

The state of the housing market in 2023

The UK housing market has been through a rollercoaster ride in the past two decades, with periods of rapid growth followed by sharp downturns.

Historic house price movements

According to Halifax, the average new home in the UK cost £294,845 in August 2022, which was an all-time record. This represented a 9.4% increase from a year earlier and a staggering 230% increase from January 2000, when the average price was £89,292.

However, this impressive growth was not smooth or uniform across regions or time periods. The UK housing market experienced two major booms and busts since 2000: one between 2000 and 2008, and another between 2013 and 2021.

The first boom was driven by strong economic growth, low interest rates, easy credit availability and rising demand from first-time buyers and buy-to-let investors. House prices more than tripled between January 2000 and August 2007, reaching a peak of £199,612. 

However, this boom came to an abrupt end with the onset of the global financial crisis in late 2007. The crisis triggered a credit crunch that made mortgages harder to obtain and more expensive to service. It also caused a recession that reduced incomes and consumer confidence. As a result, house prices fell by nearly 20% between August 2007 and April 2009, reaching a low of £154,663.

The second boom started after a period of stagnation between 2010 and 2012. It was fuelled by several factors: 

1. Low interest rates that kept borrowing costs low.
2. Government schemes such as Help to Buy that supported first-time buyers.
3. Limited supply of new homes that failed to keep up with demand.
4. Increased foreign investment in prime London properties.
5. Pent-up demand from buyers who had postponed their purchases during the crisis.
6. Rising rental costs that made buying more attractive than renting for some households. 

House prices rose by nearly 70% between April 2012 and March 2021, reaching a peak of £256,000.

The impact of the Covid pandemic

The covid pandemic had a massive impact on the UK housing market in both positive and negative ways. 

On the one hand, it disrupted normal activity for several months in early 2020 during the lockdown. Transactions of residential properties fell by nearly half between March and April 2020, while mortgage approvals dropped by more than two-thirds over the same period. House price growth also slowed down significantly, from an annual rate of over 8% in February 2020 to just over 1% in June 2020.

On the other hand, the pandemic also stimulated some unexpected sources of demand for housing. One was the need for more space due to greater home working, which prompted many people to look for larger or better-equipped properties, especially outside urban areas. 

Another was the stamp duty holiday introduced by the government in July 2020, which offered buyers a tax break on properties worth up to £500, 000 until March 2021 (later extended until June). 

This incentive encouraged many people to bring forward their purchases or enter the market for the first time. These factors, combined with the easing of lockdown restrictions, a strong economic recovery, and continued low interest rates, created a surge in activity and prices in the second half of 2020 and the first half of 2021. 

House prices increased by nearly 20% between June 2020 and June 2021, while transactions reached record levels.

The UK housing market experienced a remarkable boom in 2022, driven by a combination of factors such as pent-up demand, low interest rates, government support schemes and changing preferences due to the pandemic.

According to the Office for National Statistics, average UK house prices increased by 9.8% in the 12 months to December 2022, reaching a record high of £294,000. The highest growth was recorded in the East Midlands and northwest England, while London saw a modest increase of 2%.

The current state of UK housing market

However, this boom came to an abrupt end in early 2023, as the UK faced a severe economic downturn triggered by rising inflation, higher interest rates and supply chain disruptions. 

The cost of living crisis has eroded household incomes and consumer confidence, making it harder for buyers to afford mortgages and other housing-related expenses. 

The Bank of England has raised its base rate from 0.1% at the start of 2022 to 4% by February 2023, and is expected to hike it further to around 4.75% by the end of the year. This has increased borrowing costs for homeowners and dampened demand for new loans.

As a result, house prices have started falling month-on-month since January 2023, with Scotland reporting a hefty 2.9% decrease in December 2022. The number of mortgage approvals has also plummeted to 43% below the average for December, indicating a slowdown in market activity. 

The current state of the housing market in the UK is very uncertain, especially for those who bought properties at peak prices or with high loan-to-value ratios. 

Many homeowners may find themselves in negative equity or struggling to meet their mortgage repayments if interest rates rise further or their incomes fall due to unemployment or wage cuts. Some may be forced to sell their homes at a loss or face repossession if they default on their loans.

Future outlook

Property experts predict that house prices will continue to decline throughout 2023, with some variation depending on location. Nationwide forecasts a fall of 5% on average, while Savills expects a drop of 10%, with London prices falling by as much as 12%. Capital Economics warns that in a worst-case scenario, house prices could slump by more than 20% this year.

There are several factors house buyers and property investors have to contend with:

– Rising mortgage rates: The Bank of England has hinted that it will continue raising interest rates as and when necessary if inflation persists. This will increase borrowing costs for homebuyers and reduce their affordability. According to UK Finance, gross mortgage lending for house purchases will fall to £131bn in 2023 from £171bn this year and a peak of £189bn in 2021.

– Poor economic outlook: The UK economy is expected to enter a recession in 2023, as the impact of Brexit, Covid-19 and global supply chain disruptions take their toll on growth and employment. This will dampen consumer confidence and spending power, as well as increase unemployment and repossessions. According to RICS, repossessions will rise by 50% in 2023 compared to pre-pandemic levels.

– Supply-demand imbalance: The supply of new homes has not kept up with demand, especially for affordable and social housing. This has created a shortage of properties for sale and rent, pushing up prices and rents beyond many people’s reach. According to JLL, renters in the UK are spending 31.3% of their income on rent, rising to 36.1% in London.

As a result of these factors, Savills predicts that UK house prices will drop by an average of 10% in 2023, with some variation depending on location. London prices are predicted to drop by as much as 12%.

Some buyers may see this as an opportunity to enter the market at lower prices and benefit from more choice and less competition. 

However, they will still face challenges such as tighter lending criteria, higher deposit requirements and reduced affordability due to higher interest rates and living costs. They will also need to be cautious about buying properties that may lose value further or require costly repairs or maintenance.

The outlook for the UK housing market beyond 2023 is unclear and depends on how quickly and effectively the government can address the economic challenges facing the country and restore confidence among consumers and businesses. 

Some analysts expect that house prices will start recovering from late-2024 onwards as interest rates begin to decline again and economic conditions improve. However, others warn that it may take longer for demand and supply to rebalance and for values to return to pre-crisis levels.

The outlook for the UK housing market is uncertain and challenging for many people who want to buy or sell property. However, there may also be opportunities for those who can take advantage of lower prices or higher rents.

If you’re looking to buy a house, be sure to check out our definitive guide to Islamic mortgages.