Housing market set for a price correction in 2023, following 14 consecutive quarters of growth
On 23rd September, Liz Truss released a ‘mini-budget’ whichprovided a package of tax cuts, including an increase in the nil-rate of StampDuty and expanded Stamp Duty relief for first-time buyers. This was done in anattempt to combat the cost of living crisis and likely economic downturn. The‘fiscal event’ had a tumultuous effect on the economy, resulting in; a surge on10-year government bond yields, a £65bn bond-buying intervention from the Bankof England, a -1.8% fall in the FTSE, and the crashing of Sterling against theUS Dollar.
All of this led to a surge in interest rates and caused suchuncertainty in the financial SWAP markets that high street banks withdrewhundreds of mortgage products as they faced uncertainty over the future of bankrates.
The market has since calmed somewhat, assisted by thechanging of the Prime Minister, to Rishi Sunak, and the chancellor, to JeremyHunt; along with the reversal of the majority of the tax policies initiallyproposed in the mini-budget. The FTSE has recovered back to its position beforethe shock-related fall and Sterling has also recovered but continues to beextremely sensitive to political rhetoric as market uncertainty is still high.
The political shock was on top of already existinginflationary pressures, weaker growth and tighter financing conditions. Ingeneral, this will make it harder for households and businesses to repay orrefinance debt as well as being more vulnerable to economic shocks. The UKeconomy is feeling this, with 87% of adults in Great Britain reporting anincrease in their cost of living in August 2022 (most recent data available).The heightened cost of living is reflected in the latest inflationary figuresfrom the ONS, with the CPI rising by 10.1% in the 12 months to September 2022.In response, the government has announced a £37 billion support package,including a £400 energy grant for all households and payments of £650 tohouseholds on means-tested benefits.
Confidence in the post-pandemic recovery of the globaleconomy continues to be negatively impacted by the ongoing geopoliticalsituation in Europe. The situation has caused great uncertainty amongstmarkets, businesses, and consumers. The latest Business Confidence Monitorshows business confidence index weakening to -5, the first time it has beennegative since 2020. All sectors have experienced declines and firms are facingsignificant supply-side challenges. GfK’s Consumer Confidence Index set a newrecord low in September with an index score of -49, largely driven by a fall inconfidence over the general economic situation over the last 12 months. Astringent set of economic sanctions as a result of the invasion of Ukraine hasplaced additional constraints on the global supply of energy and worsenedglobal inflation. This is in addition to the initial rise in UK energy prices,as a nationwide increase in the energy price cap came into effect in April2022.
In response tosurging inflation, the Bank of England increased the interest rate; as of 3rdNovember the rate was increased by 0.75 percentage points to 3% – the largestincrease since 1989. It is the eighth increase since rates were slashed at thestart of the pandemic. Official forecasts expect further rises in rates overthe next four or five years, as the Bank of England has vowed to start gettingprices down and making life more affordable again. The rate increases areexpected to be factored into new fixed-rate mortgage deals, whilstvariable-rate mortgage holders have already seen their rates increase toreflect the increasing bank rate. Forbes report that average interest rates fortwo and five-year fixed rate mortgages in early October 2022 topped 6% for thefirst time in over a decade.
Many macro variables are pointing to a slowing economy: GDPgrowth is slowing (QoQ growth was 0.7% in Q1 2022 and is 0.2% in Q2 2022,provisional figures show a drop in August of - 0.3%), the FTSE ended Q3 2022 8%below the start of the year and the Euro exchange rate has been in slow declinesince Q1 2022 (from 1.20 to 1.18). However, unemployment stands at an almost 50-yearlow at 3.5%. There are an estimated 627,000 more people in payroll employmentcompared to pre-pandemic levels. That being said, it is said that at least 3.7million people are in insecure jobs, up from 3.6 million in 2021.
Concerning Brexit, the UK has signed two trade agreementswith Australia and New Zealand along with digital trade agreement withSingapore. Furthermore, there are negotiations in progress for theComprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP),which is a free trade agreement between 11 countries around the Pacific Rim aswell as ongoing negotiations with the US.
The latest HM Treasury forecasts expect GDP growth of 3.6%over 2022; a significant downward revision from their January 2022 forecast of7.1%. For 2023, HM Treasury predicts growth of 0.1%, again significantly downfrom their January 2022 forecast. The downward revisions reflect the ongoinggeopolitical situation. The latest available forecast from the OBR at the timeof writing was from March 2022 as the October forecast is not yet available. Wewould expect there to be a considerable downward revision to the OBR Octoberforecast to be more on par with HM Treasury. The slow recovery predicted for2023 has been tied to the “cost-of-living squeeze, withdrawal of fiscal support,and tighter monetary policy.”
OBR March 2022 unemployment forecasts are reasonably on parwith HM Treasury; 4.0% in 2022 and a slight increase to 4.2%-4.3% in 2023.Similarly, for inflation, both forecasts expect high peaks this year,decreasing to 4%-4.5% in 2023 which is still above the target 2%. The inflationforecasts for this year have increased as the cost of living crisis hasprogressed. HM Treasury forecasts for the Bank rate this year are clearly lowerthan the current bank rate. They forecast an increase in the bank rate in 2023.