House prices to fall by 5% in 2023 – Nationwide

Strengthening economic headwinds will hit market momentum and house sales to push property prices down by 5% in 2023, Nationwide warns.

The UK’s largest building society says that a ‘relatively soft landing’ is still possible for prices since the housing market is proving to be resilient.

Looking at what is in store for the housing market in 2023, Robert Gardner, Nationwide Building Society’s chief economist, said: “For the first three quarters of 2022, the housing market was remarkably resilient.

“For much of the year, activity levels remained at or above pre-Covid levels with annual house price growth in double digits, ranging from 10% to 14.3% in the first eight months of the year, despite intense pressure on household finances from surging inflation and a steady rise in mortgage interest rates.

“Between January and August, the average UK house price increased by almost £20,000, from £255,556 to £273,751.”

Affordability was already being stretched

He adds that the market’s performance is ‘surprising’ because affordability was already being stretched – especially for the tightening of deposit requirements.

Plus, in recent years, house prices have outstripped earnings by a wide margin in recent years and a 10% deposit on the typical mortgage on a first-time buyer property increased to almost 60% of annual gross earnings – an all-time high.

Mr Gardner said: “But the financial market turbulence which followed the mini-Budget at the end of September represented a major shock to the housing market.

“The number of mortgage applications slumped towards the lows seen at the start of the pandemic as a spike in long-term interest rates quickly fed through to mortgage rates and fundamentally changed the affordability dynamic for prospective buyers.”

He says that when mortgage rates moved towards 6%, the monthly mortgage payment on a typical first-time buyer property – bought with a 20% deposit – increased to the equivalent of 45% of an average worker’s take-home pay.

This was similar to the levels prevailing in 2007 on the eve of the financial crisis and well up from the 30% prevailing earlier in 2022, which was close to the long run average.

Financial market conditions have settled

Now, Mr Gardner says that financial market conditions have settled, and long-term interest rates are returning to the levels seen before the mini-Budget.

However, he warns that mortgage rates are taking longer to return to normal and housing market activity levels are showing few signs of recovery.

On top of this, house prices saw three successive monthly declines since September – that’s the worst run since 2008.

Mr Gardner said: “The recent weakness may, in part, reflect an early start to the usual seasonal slowdown, with potential buyers opting to wait until the New Year to see how mortgage rates evolve before looking to transact.

“But it will be hard for the market to regain much momentum with economic headwinds set to strengthen, as real earnings fall further, the Bank of England moves interest rates higher and with the labour market widely projected to weaken as the economy shrinks.”

The economist says that ‘there is still a good chance’ that a ‘relatively soft landing’ can be achieved in 2023 with market activity stabilising below pre-pandemic levels and house prices edging lower – perhaps by around 5%.

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