House prices: there's no boom and bust, just a gentle dip

Q3 2023

It’s difficult to take a step back and see the housing market in its widest context, comparing conditions now to the past. 


Matthew Henderson

Associate Director, Residential Research

+44 (0) 7818 254017

And its especially difficult if you are in the middle of re-mortgaging following 14 consecutive base rate rises from 0.25% 18 months ago to 5.25% today – the highest rate in 15 years.

The average five-year-fixed-rate mortgages have increased from 1.63% in January 2022 to 4.95% as of June 2023.

For many prospective first-time buyers the home ownership dream is fading too as borrowing becomes more expensive with every rate rise.

However, there is some comfort to be found in the bigger picture as we head into the autumn selling season and look ahead to the spring next year.

The UK economy shows resilience
Global inflation is tailing off. A recent blog from the International Monetary Fund projects a decline in global headline inflation from 6.8% to 5.2% in 2024.

The UK Government has also been adding more trades to its 'shortage occupation list', to meet demand and curtail runaway wage growth and inflation.

Core inflation has fallen further than expected this summer, a decrease partly driven by falling wholesale gas prices and falling demand due to the cost-of-living crisis.

The inflation rate (Consumer Price Index) is forecast to fall to 2.4 per cent in 2024 (HM Treasury)

Strutt & Parker's associate director of residential research, Matt Henderson, cautions that it might take time for the full impact of the rate rises to come through the UK economy, but so far it has been resilient and evaded recession.

Interest rates are expected to be reduced once inflation is under control, and with digital disrupters entering the mortgage market the banks also have to offer competitive products.

Don’t look back for guidance
The speculative noise currently surrounding the UK housing market does not reflect a dramatic rise and fall in house prices. In 2008, following the global financial crisis, values fell as far as 20% in the UK.

Following the mortgage market review – which enforces strict stress testing and the withdrawal of 100% loan-to-value mortgages – there should be fewer distressed sales now, despite the interest rate hikes. It is the flurry of such sales that causes prices to tumble at pace and, although inevitably there will be some, they are not expected to make up such a large proportion of transactions this year.

The term 'mortgage mayhem' has been bandied about since the Truss mini budget, but the number of fixed term mortgages due for renewal (around 400,000 per quarter) is relatively small and the market is able to cope.

"We have only seen a small fall in property values in the first half of the year, and transactions have not slowed as dramatically as many expected. The housing markets have been relatively robust," says Matt.

The pandemic price rush
The most recent spike in house prices was in reaction to the first lockdown, when there was an increase in demand for more space, stoked by the emergency stamp duty holiday. This window of reduced tax prompted a huge number of households to move at the same time, which sent prices soaring. The average price of a detached house increased by a third.

The uncertainty of when interest rate rises will reverse is naturally causing sales to slow and price reductions to become more frequent. But prices are not coming down at the same rate as transactions. In reality, we are largely seeing a more gradual unravelling of the dramatic and unsustainable price rises of the pandemic.

Although transactions have slowed significantly on average across the country, localised areas of high demand are still seeing strong activity levels. For example, in Prime Central London, half of Strutt & Parker’s offices have seen the same, or more, completed sales in Q2 2023 versus Q2 2022. Meanwhile, three quarters of our regions have seen more offers accepted in the first half of this year than they did over the same period in 2022.

The average property price fell 3.1% in the year to Q2 2023 (Nationwide House Price Index) the second consecutive quarter of negative annual growth.

The cost-of-living crisis and interest rate hikes have exacerbated the natural readjusting of the market following the pandemic, but the likelihood of drastic falls and rises is receding.

"In the first half of this year we've observed a modest decline in nominal house prices. This is a less dramatic change than what was initially predicted," says Matt. "It seems that moderate fluctuations in prices may become a consistent pattern. This year's gentle dip in value could likely be succeeded by a similarly moderate increase in the coming years once market sentiment shifts," he explains.

House prices across the UK are set to fall between 0 and 5% in 2023 (Strutt & Parker UK Residential Market Review).

How to sell in 2023
Every sale is unique. One family may need to move to accommodate a birth or a first-time buyer may be desperate to leave renting behind. They will both be highly motivated to find the right property. On the flip side, a pair of retirees desperate to move closer to the grandchildren may be just as eager to sell. These sales and purchases will complete if the price on both sides is right.

"Price sensitivity is more important than ever as people risk down valuations at the point of mortgage if they pay over the odds," warns Kate Eales, head of regional residential at Strutt & Parker.

"Some buyers think it is 2008 and some sellers think it is 2021 – it is neither. But there is a standoff that has led to a fall in sales as the market has cooled," Kate Eales.

There is a fundamental lack of both new-build homes and re-sale homes for sale in the UK, meaning that despite the economic conditions and market uncertainty there is still demand, especially for the most sought-after villages, streets and catchment areas.

In which case, September is the time to prepare your home for sale if you need to move by Christmas. Use these last few weeks of good weather to prepare your home and garden, photograph it if you haven’t already, and if you have a poor EPC rating address it now, and get your documentation in order.