The autumn of 2022 saw economic and political instability with the resignation of Boris Johnson as Prime Minister and the ill-fated Liz Truss 44-day premiership. Now as we go into 2023, the economic and political turmoil has subdued, offering a greater feeling of stability in money markets.
So, on the back of that, what is the expectation for the British (and Newbury) housing market as we go into the new year?
The biggest issue is inflation. Low steady inflation of around 2% a year is good for the economy, yet the high levels we are experiencing now isn’t. It affects the spending power of the pound in your pocket, and it alters the way people spend their money (including buying and selling property).
Too much inflation is bad for the economy and therefore, ultimately the property market.
Two things will reduce inflation.
One is a recession and the other is increased interest rates.
Many find it fascinating that the Bank of England were talking the UK economy into a shallow recession in the autumn. Yet there was method in their madness. It was because they didn’t want to rely solely on the second method of increasing interest rates.
Better for the economy to have a shallow mild recession and interest rates rising to say 4.5% by the middle of 2023 to reduce inflation, than placing the whole job of reducing inflation on interest rates.
If that had been the case, interest rates would need to rise to say 7% (or more), causing the economy (and property market) to stall … and thus create a subsequent deep and long recession.
So, with the Bank of England having recently increased its base rate to 3.5%, with more interest rate rises to come in 2023, what does this and the mild recession mean for the Newbury property market?
A recession will increase unemployment levels, which have been comparatively low in the last few years. Depending on the type of roles/jobs that are made redundant, will determine the effect on the property market. Until that happens, we won’t know.
Everyone is suffering from higher gas, electric and shopping bills, yet with interest rates rising, this will increase the pressure on household budgets. Higher interest rates mean higher mortgage payments if the homeowner/landlord is on a variable rate mortgage (17 out of 20 homeowners with a mortgage are on a fixed rate).
It’s these two factors of recession and interest rates that will place negative pressure on Newbury house prices.
Yet let us not forget this pressure is coming off the back of two of the strongest years on record in terms of house prices and transaction levels.
Newbury house prices have experienced 19.9% price growth since the pandemic started in March 2020.
This is interesting when compared to the UK average, where average house prices have risen by 27.4% or £44,700 since March 2020.
Before I tackle the issue of house prices in 2023, I would like to look at the number of transactions.
To many the number of properties selling is irrelevant, yet I believe it is as important, if not more important, than house prices. I believe the best way to judge the health of the property market is the number of people moving home.
Many economists believe the number of property transactions is a better judge of the health and virality of a housing market. The higher the number of people moving home is better for the whole economy than a smaller number of property transactions, whilst the same can’t be said for higher house prices.
Transactions levels have been quite high in the last couple of years. 616 households per year have moved home in Newbury since lockdown, compared to the long-term 27-year average of 462 per year.
Finally, let’s look ahead at Newbury house prices may look like in 2023.
A good place to start to judge house prices is how many reductions are taking place on the properties that are already on the market.
In the last 3 years, the average number of price reductions for the properties for sale in Newbury (RG14) has been 28 reductions per month. In October there were 57 price reductions and in November 56 reductions.
Homeowners are being more realistic with their pricing and the price that one will achieve for their Newbury home today and the rest of 2023 will be comparable to what one would have achieved in the spring of 2022.
Yet, as most people buy another property when they sell (and most of the time move up market) the price you would have had to pay on the next purchase would have been even more!
Final thoughts.
Several economic commentators are preaching doom and gloom for the property market in 2023, yet the situation is very different to the Credit Crunch years of 2008/9. The property market crashed in 2008/9 mainly because the banks and building societies stopped lending money.
There are two major differences this time round.
The first is the introduction of Mortgage Market Review mortgage stress testing instigated in 2014.
Homebuyers taking out a mortgage must have undergone a stress test on interest rates to obtain a mortgage since 2014. These stress tests are a safeguard to ensure that if their household income continued to be the same, the homeowner could afford higher mortgage rates.
The second is the banks and building societies have much higher cash reserves. Higher reserves will ensure they can continue to lend money and so more mortgages are available, although at a slightly higher interest rate than a year ago.
With mortgage rates falling back, with some very attractive fixed-rate deals knocking on the door of 5%, this is a development that may continue into 2023 as banks and building societies obtain cheaper funding sources and then compete for business by driving down the price of mortgages – which would only be good news for the property market.
I think we can look forward to another strong year in 2023. If you would like a more detailed overview of the market, or indeed an appraisal on your home, please do get in touch with the team on 01635 523777.
Wishing you all a happy and prosperous 2023.
