Choppy Waters: Where Are UK Property Prices Heading in the Near Term?
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by Robert Jones, Founder of Property Investments UK
With nearly two decades in UK property, Rob has been investing in buy-to-let since 2005, and uses property data to develop tools for property market analysis.
UK house prices have been on a broad upswing for a decade or so. Buyers and sellers have come to believe that house prices will always rise. Recently though, the market has become much less certain. So now is a good time to ask: Will house prices keep on rising or will there be a housing market crash?
How to Forecast House Prices
Is it even possible to forecast house prices accurately? Even the experts get it wrong sometimes. As recently as 2018-19 some experts were predicting a crash. In fact, the reverse happened and prices rose to record levels.
One way to try and forecast where house prices might be going next is to look at the fundamentals that underpin the property market.
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Housing Supply
As with any market supply and demand combine to affect property prices. The UK generally has a housing shortage and this has almost certainly supported price rises in recent years.
The Centre for Cities suggests that the UK has a shortage of 4.3 million homes.
New housing supply is more likely to fall rather than rise in the near future. The House Builders Federation suggests new housing supply could fall to a record low in the coming years.
Housing Demand
In recent years the popularity of home ownership has soared. But demand depends on a number of factors:
Employment Levels and Incomes
Buyers are more likely to buy if they are in secure, well-paid employment. Most house buyers cannot buy if they are not in employment.
UK employment levels are still around record highs (76%) according to ONS data. However, incomes are falling sharply according to the Resolution Foundation.
The Cost of Living and Inflation
These fundamentals impact buyers’ ability to buy and how much they are willing to pay for a house. People are less likely to buy, and can only pay less if the high cost of essentials like food and energy restricts their disposable income.
This OBR research says that in 2022-23 and 2023-24, living standards are set for the largest fall on record.
Affordability
How affordable (or unaffordable) property is is a factor in the housing market. An important statistic to consider is the property price to incomes ratio.
According to Schroders, the average house in the UK costs around nine times the average earnings. The last time house prices were this expensive relative to average earnings was 150 years ago.
Demographics
Key demographics influencing housing demand include population growth, the birth rate and the immigration rate. More people = more demand for housing. The reverse is also true.
The number and size of families are also relevant. If more people decide to live alone or in smaller households the demand for housing is likely to rise.
ONS data says there are around 19.4m families in the UK, an increase of 1m families (5.7%) in a decade.
And this ONS data forecasts the population of the UK is projected to increase by 3.2% in the coming years, from an estimated 67.1m in mid-2020 to 69.2m in mid-2030.
Investor Activity
It’s important to remember that it is not only demand from owner-occupiers that impacts housing demand. If investors see property as an attractive investment, compared to other types of investment, they are more likely to buy and vice versa.
Recent legislation has made some investors reconsider property investment. However, if house prices fall letting yields are likely to rise and this could attract more investors to buy property.
Many foreign investors in particular still regard the UK as a safe place to invest in property.
The State of the Economy
It’s often said that the state of the economy affects property prices. Here are some key fundamentals to consider:
Interest Rates
From 2009 onwards interest rates in the UK dropped to historic lows and this almost certainly caused property prices to rise. Recent rate rises appear to have contributed to a dampening of the market, however.
Where interest rates go next is likely to be a major factor in future house prices.
This recent report from Ernst & Young forecasts that bank rates will peak at 5.5% later this year before rates start to be cut again from the second half of next year.
The Availability of Mortgages
How keen (or reluctant) lenders are to offer mortgages (and how much) is believed to impact house prices. Looser lending policies are believed to have contributed to the 2008 financial crisis. Tighter policies subsequently caused the market to falter.
Opinions on this differ right now. However, this press report says that mortgage lenders are becoming more cautious at the moment.
Government Housing Policy
Governments often see homeownership as a vote-winner and pursue policies to this end. The Right to Buy scheme and Stamp Duty holiday in recent times made buying easier and more attractive, but these have now ended.
This is very much something of a wild card at the moment. It remains to be seen what government housing policy will be following the next general election, likely to be held in 2024.
Market Confidence
Market confidence and how people see property prices moving can impact how prices actually move. If potential buyers feel prices are going to rise then they are probably more likely to buy, and vice versa.
OnTheMarket’s recent Sentiment Index says that confidence in UK property is still stable despite economic uncertainty. It says 74% of active buyers were confident that they would purchase a property within the next three months. 64% of sellers were confident that they would sell their property within the next three months.
When looking at house prices it is important to recognise that the UK property market is not homogenous. Even when prices are falling or rising nationally they may be doing the opposite in some local areas.
Expert House Price Forecasts
- The Office for Budget Responsibility suggests house prices will fall consistently over the next year or so before beginning to rise again very slightly. They suggest annual price changes will be -3.8% in 3Q 2023, -7.2% in 4Q 2023, -8% in 1Q 2024, - 6.6% in 2Q 2024, -4.9% in 3Q 2024, -2.9% in 4Q 2004 and -0.1% in 1Q 2025. They forecast annual price changes will be +0.7% in 2Q 2025.
- This Savills forecast for mainstream property values nationally suggests they will fall 10% overall in 2023 before rising again by 1% in 2024, 3.5% in 2025, 7% in 2026 and 5.5% in 2027.
- S&P Global Market Intelligence forecast that UK house prices will fall by a cumulative 9% between the end of 2022 and mid-2024. They forecast the market will then ‘stagnate’ with growth of just 1.4% and 3% in 2025 and 2026.
Expert House Price Forecasts
- The Office for Budget Responsibility suggests house prices will fall consistently over the next year or so before beginning to rise again very slightly. They suggest annual price changes will be -3.8% in 3Q 2023, -7.2% in 4Q 2023, -8% in 1Q 2024, - 6.6% in 2Q 2024, -4.9% in 3Q 2024, -2.9% in 4Q 2004 and -0.1% in 1Q 2025. They forecast annual price changes will be +0.7% in 2Q 2025.
- This Savills forecast for mainstream property values nationally suggests they will fall 10% overall in 2023 before rising again by 1% in 2024, 3.5% in 2025, 7% in 2026 and 5.5% in 2027.
- S&P Global Market Intelligence forecast that UK house prices will fall by a cumulative 9% between the end of 2022 and mid-2024. They forecast the market will then ‘stagnate’ with growth of just 1.4% and 3% in 2025 and 2026.
House Prices Could Fall, or Crash
High inflation, the rising cost of living and high-interest rates could not only deter people from buying but lead to distressed or repossession sales. A glut of property on the market that no one wants/can afford to buy could push prices down, or even cause a market crash. This might appear to be a more likely scenario and has occurred in previous market downturns.
However, government and lender policy today tends to favour forbearance rather than repossession and this might help to support the market.
House Prices Could Continue To Go Up
Record house prices, stretched affordability and less favourable buying conditions might suggest house prices cannot possibly rise. But could they? Potentially, if demand falls supply of houses for sale could fall too. That could mean that people who have to move/can still afford to buy have very little property to choose from. And that could help support prices.
This is perhaps more likely to happen in some in-demand local areas than nationally though.
House Prices Could Stagnate
Uncertain market conditions could discourage both buyers and sellers alike. The market could go into a ‘deep freeze’ with very few buyers and very few sellers so that no clear price changes occur. This situation is only likely to be very short-lived, however.
All These Things Could Happen
Property markets are known for being cyclical, or boom and bust as it is sometimes known. They rise, become unaffordable, fall, become affordable and buyers start buying again.
This article on the 18-year property cycle explains the theory behind cyclical property markets. It suggests a property market crash could occur around 2026-2027 followed by four years of property market recession before a recovery begins in the early 2030s.
While house prices have risen and fallen over recent decades it’s probably true to say that there have never been so many different forces at play in the market as right now. And rarely has each factor been so difficult to forecast. As each factor plays out at its own speed that could make for a very volatile market in the years ahead.