UK House Price Index (December 2023)
Join us as we take a look at the UK House Price Index for December 2023. Including house price growth, inflation, number of sales and more. How did we end the year?
Annual UK house price inflation: -1.1%
Sales agreed vs. a year gap: 2%
The proportion of movers that are first-time buyers: 1 million
Summary
- The yearly increase in house prices is now at -1.1%, marking a decrease from the +7.2% reported one year earlier
- Market sentiment is on the rise as new sales agreed, show a year-on-year increase of 17%
- The decline in house prices is beginning to ease as there is an improvement in sales
- Mortgage regulations play a pivotal role in the relatively moderate price declines observed in 2023, alongside a robust labour market and rapid earnings growth
- In the coming two years, the most significant segment of potential movers comprises first-time buyers at 40%, followed by upsizers at 34%
- Nearly 50% of buyers residing in southern England are seeking to relocate more than 10 miles away in pursuit of improved value for money
- A 2% decline in house prices is anticipated for 2024, accompanied by 1 million sales
The housing market has displayed greater resilience than anticipated throughout 2023, a development not unexpected by us. Mortgage regulations prevented an overvaluation of housing, resulting in moderate price declines.
Sales remain steady in the fourth quarter of 2023, offering support to prices
The concluding weeks of 2023 have witnessed an uptick in new sales, surpassing the average and marking a 17% increase compared to the previous year, surpassing 2019 levels. The positive shift in market sentiment can be attributed to growing incomes and an initial decrease in mortgage rates. Additionally, a 25% rise in available supply compared to the previous year is enhancing choices and bolstering sales.
Harmony between buyers and sellers on pricing is emerging, alleviating downward pressure on property values. As of November 2023, our headline UK house price index indicates a more moderate annual decline of -1.1%, a significant drop from the +7.2% reported a year ago. The moderation in price declines is now evident across all regions and countries in the UK.
House price indices deviate during pivotal moments in the market
UK house price indices generally align over time, but they tend to diverge during market turning points due to changes in the volume and composition of sales.
Cash transactions are projected to constitute approximately one-third of all sales in 2023, playing a crucial role in shaping pricing trends. The average price of cash purchases tends to be 10% lower than that of mortgage-funded sales, rendering cash transactions somewhat more affordable and likely requiring more modest price adjustments to stimulate demand.
Mortgaged sales are anticipated to decrease by 30% in 2023, impacted by heightened mortgage rates dampening demand. Mortgage lender house price indices responded swiftly to the weakened demand, recording more substantial price declines during the latter part of 2022 and the first half of 2023. Nevertheless, the annual growth rate for the lender series has shown improvement in recent months as market activity and pricing stabilised.
What factors have prevented more significant declines in house prices in 2023?
Historical trends would imply that the surge in mortgage rates from 2% to over 5% should have resulted in more substantial declines in house prices throughout 2023.
Despite predictions of more significant falls, several factors have contributed to the resilience of prices. The robustness of the labour market, coupled with high earnings growth, has played a crucial role. Lenders have implemented forbearance policies to assist households facing repayment challenges, thereby limiting the number of compelled sellers.
However, the most influential factor in this context has been the stricter mortgage affordability testing introduced for new borrowers since 2015. These regulations were designed to prevent households from undertaking excessive debt during a period of low mortgage rates, averting a potential housing over-valuation and instilling resilience in many households to navigate the transition to higher mortgage rates.
Even as mortgage rates dipped to 1.3% in late 2021, new mortgage borrowers had to demonstrate to their banks that they could afford a 6-7% stressed mortgage rate to secure the loan. Banks were also constrained to a maximum of 15% of new business at high loan-to-income ratios exceeding 4.5 times.
These regulations effectively capped the purchasing power of homebuyers, necessitating a higher income and larger deposit, particularly in pricier housing markets. Data indicates that first-time buyers in London, for instance, deposited an average of £145,000 in 2022, compared to £26,000 for that buying in the North East.
Presently, lenders are stress testing new borrowers at nearly 9%, despite a decline in mortgage rates. This regulatory limitation on buying power is a key factor contributing to our belief that house prices are unlikely to increase in 2024, even as base rates start to decrease later in the year.
In 2024, first-time buyers are expected to retain their status as the most significant buyer demographic
Despite the challenges in affordability faced by first-time buyers, they constitute the largest segment among potential homebuyers. According to our most recent consumer survey, 40% of individuals looking to purchase a home in the next two years fall into the first-time buyer category.
The persistent surge in rental costs continues to drive the motivation of this group. Average rents have experienced a faster increase compared to average mortgage repayments over the past three years, even in the face of larger required deposits.
Upsizers make up approximately one-third of prospective buyers in the next two years, typically aiming for larger homes that necessitate larger mortgages. Throughout 2023, this group has been waiting for greater clarity on the economic outlook and mortgage rates. The trajectory of mortgage rates and achieving better value for their investment will be pivotal considerations for upsizers in 2024.
Buyers are searching beyond their immediate vicinity in pursuit of better value
Approximately a quarter of potential home movers express their intention to relocate to a different location. Traditionally, a significant number of home relocations occur within local areas.
However, with rising borrowing expenses and the pursuit of better value, a notable trend anticipated for 2024 is that buyers will continue to explore more distant locations. This trend is particularly pronounced in high-value housing markets where the cost of upsizing is significant.
Our data indicates that up to half of prospective movers currently residing in southern regions are eyeing relocations of more than 10 miles. In other parts of the UK, the proportion of individuals considering longer-distance moves is comparatively lower.
This trend bears significance for both home builders and estate agents, as they often concentrate on understanding and catering to local demand. However, it is crucial to recognise and nurture demand originating from more distant areas, especially considering that these buyers may have a greater budget at their disposal.
Our 2024 outlook
We anticipate the consistent upward trajectory in new sales witnessed in the latter part of 2023 to persist into early 2024, coupled with the typical seasonal surge in demand during Q1 as pent-up demand reenters the market.
Despite a gradual decrease in mortgage rates, affordability remains a significant hurdle for households dependent on mortgages when deciding on housing moves. The repercussions of higher mortgage rates are still unfolding, with half of mortgagees yet to transition from cheaper fixed-rate deals agreed upon before 2022 to higher rates.
The marginal decrease in house prices throughout the year indicates that the UK housing market still appears to be overvalued by 10-15% as of the end of 2023. We anticipate a gradual improvement in this scenario throughout 2024 as incomes rise and house prices experience a 2% decline over the year. Sales volumes are expected to remain steady, with an estimated 1 million completed sales in 2024.
+17% - The number of new sales agreed vs this time last year
8.8% - Average mortgage stress test rate for new borrowers
23% - Buyers looking to move to a different location
40% - Movers in the next 2 years are first-time buyers
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