We look back at the main events that took place in the housing market this year and looks forward to what we can expect from 2024.
Fall, rise and fall of mortgage rates
Rising borrowing costs have been a game changer for the housing market.
At the start of 2023 rates had begun to fall back to around 5% after spiking above 6% following former Prime Minister Liz Truss’s ill-fated mini budget in September 2022.
The spring brought with it optimism that mortgage rates would start to sink back towards levels seen in the summer of ‘22 when 3% deals were still on offer.
By April two-year deals at 60% LTV had fallen to 4.5%, according to Bank of England data, turning the mood in the market positive.
But it wasn’t to last. A higher-than-expected rise of 0.5 percentage points took the base rate up to 5% in June triggered by persistent inflationary pressures kicking off a fresh round of mortgage rate hikes. Deals of 6% or more were back on the shelves.
Consequently, borrower affordability has taken a big hit with borrowing power down 20%.
As the year draws to a close, two-year deals are inching back down towards 5% with the base rate stabilised at 5.25%.
Demand and supply dynamics
Demand and supply recovered in the early months of 2023, when rates drifted back from 5%. Agreed sales for the first five months of the year had moved within a healthy 2% of the five-year average.
Homebuyer demand weakened over the summer, reacting to the summer’s mortgage rate rises.
During the last weeks of H1, Zoopla’s June HPI showed buyer numbers were down 14% on the long-term average.
Where are we now? There’s certainly more choice in the market. The number of homes for sale has reached a six-year high putting more pressure on sellers to check their price expectations.
Demand, however, remains 13% down on 2019. Cash buyers maintain a firm foothold in the market accounting for between 25% and 30% of sales while the number of buyers reliant on a mortgage fell by 30% over 2023.
The overall effect is a decline in transactions. Hometrack forecasts around one million sales this year, 23% down on 2022.
Impact on house prices
Higher mortgage rates reduce affordability, and affordability plays a key role in house prices. We expect constrained affordability to dampen house price growth, and in the short term, expect to see further falls in house prices albeit still single digits.
House price falls have so far been modest. Our HPI recorded annual house price falls of 0.5% in September, 1.1% in October and 1.2% in November; the only house price falls recorded by the index in the last decade.
Robust levels of employment and wage growth coupled with stricter stress testing to ensure borrowers’ budgets can absorb several rate rises, have meant that the majority of households have not been forced into selling up. This has protected house prices from being severely impacted by higher mortgage rates.
Instead, the higher mortgage rate environment has reduced the volume of households buying and selling.
At the beginning of 2023, we forecasted low-single digit price falls. As the year draws to a close that prediction has proved to be right.
Regulation round-up
Changes to the FCA’s rulebook were brought in following the government’s launch of the Mortgage Charter in June to help those borrowers struggling to pay their mortgage stay in their homes. Improved forbearance measures will help to keep repossession volumes low which in turn will help to protect the stability of house prices.
A month later, the Consumer Duty regulations landed. The essence of Consumer Duty is that good consumer outcomes are central to every transaction. Using the most accurate valuation method suitable for a customer’s property, such as an AVM instead of House Price Index, is one way to ensure good consumer outcomes. Indexation may result in an inaccurate valuation which could produce a detrimental outcome for the borrower.
To satisfy the FCA’s Consumer Duty requirements, however, lenders must consider the increased use of data throughout the mortgage lifecycle not just at the point of origination or product transfer.
Outlook for the housing market
Next year we expect the market to continue adjusting to lower household buying power. To reset affordability, either prices or rates must fall.
We’ve already seen five-year fixed rates falling, which is positive news, with some sub-5% deals now available. But they’ll need to fall further in 2024 to bring buyers and sellers back to the market.
We forecast a 2% fall in house prices over 2024, assuming mortgage rates fall to 4.5% by the end of next year and remain there into 2025. We don’t expect further house price reductions in 2025.
Financial markets are more optimistic, forecasting that the Bank of England will start cutting rates around summer 2024.
If mortgage lenders follow suit, there will be an improvement in demand and sales volumes later next year. But with a general election looming, homeowners may take a wait-and-see approach to buying their next property until they know how a possible change of government could impact their purchase.
We think there’s unlikely to be a change in the volume of sales in 2024 which we predict will be flat at one million for the second consecutive year. But no change is better than the turbulence movers have been forced to battle with over the last 12 months.