Property market forecast and why house sales in 2023 on track to be a fifth down on 2022

Existing homeowners using a mortgage typically account for a third of annual sales and they are more likely to wait until the outlook for interest rates improves. As a result, Zoopla says that new sales of three and four bed homes were down by up to 40 per cent in July compared to the same period over the last five years, while sales of smaller and more affordable homes have fallen to a smaller degree.

Buy-to-let mortgages are also being affected by higher interest rates with mortgaged purchases accounting for just eight per cent of sales a year. The typical buy-to-let purchaser in southern England now needs to inject 40-50 per cent of the property value as equity to get the numbers to stack up, which Zoopla analysts say is not a strong proposition for a gross rental yield of less than five per cent, below the base rate.

Housing affordability remains the primary barrier to more sales and this includes house prices and the cost of mortgage repayments with the greatest challenge in southern England where the household income needed to buy an average priced home remains high at over £75,000 in many areas.

Higher mortgage rates over the last year have increased average mortgage repayments by 23 per cent or £216 per month. While mortgage rates have been falling in recent weeks, they remain over five per cent and Zoopla say they will need to fall below five per cent to improve affordability and stimulate more home moves.

However, affordability is improving relative to earnings as wages rise. They have increased by an average seven per cent over the last year. Housing affordability, on a house price to earnings basis, looks set to improve by 9-10 per cent over 2023 as prices register modest falls and average earnings increase.

The UK house price to earnings ratio will be in line with the 20-year average at the end of 2023 at 6.3 times. The surprise is that affordability has improved the most in London where the price to earnings ratio will move to single digits for the first time in 11 years as house price growth continues to lag earnings growth.

House prices in July fell in London, the South East, South West and East of England but rose slightly in the Midlands and the North, where property values are generally more affordable. In Yorkshire, house prices grew by 0.9 per cent in July and it is still cheaper to buy rather than to rent in Yorkshire, providing you have a mortgage deposit. It costs an average £758 per month to rent while a mortgage would be £731 per month.

However, Zoopla analysts say that mortgage lenders require new borrowers to be able to afford higher mortgage rates of 8.5 per cent rather than the actual interest rate of 5.6 per cent used in this analysis and that is having an adverse effect.

Commenting on the latest report Richard Donnell, Executive Director at Zoopla says: “House price growth has slowed rapidly over the last year as demand weakens in the face of higher mortgage rates. Prices are falling more in southern England where higher mortgage rates have priced more people out of the housing market and are weakening demand.

“While UK house prices are 0.1 per cent higher over the year, it is the number of sales that have been hit hardest by higher borrowing costs, especially amongst mortgage reliant buyers. Cash buyers are more immune and on track to account for more than one in three sales in 2023. Mortgage rates have started to fall slowly but rates need to fall below five per cent before we see an increased appetite to move home in the second half of 2023.”