UK Property Sector: Is the Market Expected to Crash?

The UK property market has found itself in a slightly odd position. Described as ‘broadly stable’, the market saw house prices fall 3.5% year-on-year in June, according to the latest House Price Index from Nationwide building society. This decline has been accelerating almost consequently throughout 2023, with mortgage rates rapidly increasing to keep up. Consequently, many prospective buyers have struggled, with lenders tightening their purses to combat inflation as economic conditions worsen.

Is Investing in Property Still Viable?

After a prosperous couple of years, the property market seems to have taken a turn for the worst. But are property investors right to lose faith in the housing sector?

Are Rising Interest Rates a Sign of Impending Doom for The UK Property Market?

For the thirteenth consecutive time this month, the Bank of England (BoE) increased the base rate – now at 5%, which is the highest level recorded since the 2008 financial crash. Marking a 0.5% jump, this is a major move made by BoE to combat inflation. The annual rate of inflation is supposed to be around 2%, but in the year to May, this figure was around 8.7%. While it might be easy to place blame solely on the shoulders of the BoE, there are limits to what they can specifically do. Fluctuating interest rates only really affect how much people individually spend and save. If it becomes too expensive to borrow money, then consumers will spend less in theory and that will have a massive effect on prices.

At the same time, with many experts currently predicting that interest rates have yet to hit their peak, further interest rate increases could result in even more drastic house price drops in the near future. Unless the level of inflation decreases, it’s unlikely that the Bank of England will lower the base rate. According to Morningstar, however, an “all-out meltdown” in prices is unlikely to occur, due to the ongoing demand for rental property. With interest rates expected to peak and fall by the end of this year, mortgage rates are also expected to plummet alongside.

House Price Growth Expected to Slow

House price growth is expected to be low on the year, though, with a forecasted negative growth of around -10% expected for 2023. Of course, this is not the most inspiring figure, but the good news is that the estimated five-year growth paints a much nicer picture – with some areas predicted to see a capital appreciation of 11.7% by 2027. With this in mind, this period could actually provide many investors with the option to get involved now, before prices jump up again.

Is a UK House Price Crash on The Way?

Most experts can agree that house prices will certainly fall this year, but very few can outright claim that a house price collapse is on the cards any time soon. Again, as a result of skyrocketing inflation and mortgage rates, buying power has been severely impacted.
With rates rising as they have, the majority of prospective buyers have been unable to borrow as much to buy. This has led to some sellers reducing their asking prices.

According to Zoopla, sellers are on average offering a up to 4% discount off the asking price (around £14,000). While this could cause a strain on the market, the good news is that buyers and sellers are continuing to agree to deals which are furthering activity in the housing market, no matter the cost. The first quarter of 2023 saw the housing market in a much better shape than many expected at the end of last year, with no real indication of a housing market crash.

How Much Will UK House Prices Fall?

Predictions of how much house prices will fall by vary. As mentioned, Savills expects to see a 10% decrease on the year; but other sources see much lower drops. For example, Zoopla projects that the housing market in the UK will see prices fall by only 5% in 2023, with more affordable parts of the country likely to see even smaller drops.

Areas that have seen the most consistent drops over the years are:
· London – Westminster, Chelsea, and Hammersmith
· East coast of Scotland

The North West (Liverpool and Manchester, specifically) is the region that consistently sees the most growth in the UK. Other areas include:
· Oldham
· Rochdale
· Wigan

What to Expect for The Rest of 2023?

There are various factors that can massively affect the trajectory of the UK housing market – typically the most power, though, are economic and financial. Plagued by market uncertainty, the first half of 2023 has seen a significant lack of demand for expensive property, with more buyers focussing almost entirely on affordability. While many considered this to be the first sign of decline, buyer demand in May 2023 was actually 3% higher than it was in 2019. That month also saw the highest price increase so far this year, suggesting that there is still a possibility for prices to increase over the next few months.
Reports remain conflicting, however, with one report suggesting that prices in April saw the slowest annual rate in over 10 years.

Again, with positive growth projected across the next couple of years, this does not necessarily mean that property investment should be disavowed as a viable choice in 2023. It is always advisable to review the right buy to let areas before purchasing a property in 2023.

What Does This All Mean for Investors?

Between March 2020 and Autumn 2022, house prices across the country overall rose by around 25%. No investor wants the value of their home to fall, but according to most reports, this almost seems inevitable in 2023.

For the investors that purchased property between 2020 and 2020, though, it’s not all doom and gloom. Considering the rapid gains made in this time, the majority of buyers looking to sell their property will be likely to see considerably higher returns than they would pre-pandemic – even if prices were to fall by as high as 10%.

Although it’s unlikely for the market to regain similar momentum in the near future, those looking to purchase a property shouldn’t expect too much hassle finding suitable ventures, with recent data finding that there are around 65% more homes on the market now than in March 2022.

Higher mortgage rates are expected to have a significant impact on the market. With higher rates making it more expensive for people to borrow money, there could be a slowdown in the market and sustained downward pressure on house prices. However, much depends on how inflation behaves over the next few months and overall economic conditions.