What could house prices do in 2023?

It’s a sign of just how perilous the property market has been, when estate agents told the RICS (Royal Institution of Chartered Surveyors) in October 2022 that “the property market has collapsed”, it “could be a bleak winter”, and there were “tough times ahead”.

But what does this mean for prospective buyers, sellers and mortgage holders?

On mini-budgets and rate hikes

The market was reeling from a spike in mortgage rates last autumn, propelled by the panic fuelled by the mini-budget.

On the day of Kwasi Kwarteng’s announcement, the average new two-year fixed mortgage rate was 4.74%.

By the day Liz Truss resigned, less than a month later, it peaked at 6.65%. Rates then fell back, although there are no guarantees they’re expected to continue to do so. But it’s a different world from December 2021, when rates averaged 2.34%.

This left anyone on the brink of remortgaging in a tricky spot on whether to stick with the standard variable rate (SVR), which you’re usually moved on to once your existing mortgage deal ends, or to remortgage at a higher rate. It also stopped many buyers in their tracks.

Between the mini-budget and the end of November, new buyer demand for property plummeted by 44%. The speed and size of rate hikes brought buyers out in a cold sweat, and even after rates started falling, the damage was done. It was the last thing needed on top of sky-high house prices and rising bills, and it stalled the market.

Glass half full or half empty?

There are some positives that could help shelter us from a housing market crash – not least that new fixed mortgage rates might have peaked. Meanwhile, we’re currently in a period of high employment, and even when we reach the worst point of a recession, the Office for Budget Responsibility (OBR) expects unemployment to hit a high point of just under 5%.

We also started with housing stocks on estate agents’ books close to an all-time low last autumn. One memorable time when a crash came at a time of strong employment was in the 1950s, when the boom in housebuilding meant an oversupply of stock.

Despite these positives, there’s a growing consensus that property prices are on their way down. The OBR expects house prices to fall 9% between the fourth quarter of 2022 and the third quarter of 2024, and a consensus is emerging of falls between 5% and 12% in 2023.

Downsizing or buying

For those holding property wealth and planning to downsize or give it away at some point, the prospect of falling house prices could be a worry.

For property investors, it’s a reminder of how investing in residential homes offers little opportunity for diversification. Technically, for younger people trying to get a foot on the property ladder, it could be better news. But buying in a falling market raises risks that value in your property may be eroded.

If you’re on the cusp of buying a property, it raises the question of whether you should buy now, or hold off and wait for prices to possibly fall further.

That’s like trying to catch a falling knife.

Nobody knows how far property prices will fall, and how long it will take them to reach the bottom. The only way you’ll know is when property prices start rising again. It’s impossible to time things perfectly.

Meanwhile, you could end up squeezing your family into an inappropriately sized home, or spending a small fortune on rent. For some, a ‘wait-and-see’ approach could save them money. But for many others, the costs of waiting could be too high.

This article isn’t personal advice. If you’re not sure what’s right for you, seek advice.

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