Residential Roundup - Christmas 2023

Once the Christmas decorations go up activity in the housing market tends to nosedive. This means that December is not necessarily the best time of the year to take the temperature of the UK housing market. Instead in this, the last Residential Roundup of 2023, we look back at how the UK economy and housing market fared in 2023 (spoiler alert, it was better than we thought back in January). Do sing along!

On the first day of 2023 if you’d have said to me, we’d see…

The outlook improving

The latest monthly GDP estimates show a -0.3% fall in October, against expectations it would remain flat at 0.0%, and down from +0.2% in September. Yet despite the slightly disappointing October figure the outlook for the market has improved as we’ve moved through 2023. In January consensus forecasts expected the UK economy to contract by -1.0%. But as the year progressed, we saw the outlook improve. The latest December forecasts now expecting growth of +0.5% in 2023. Admittedly far from spectacular (and the 2024 forecast is similarly underwhelming too) but a far cry from the recessionary environment many were forecasting earlier in 2023.

Big houses sticking

Post-lockdown, demand and buying power was focussed on the market for larger family homes. But rising mortgage rates mean ambitions have been curbed and interest in smaller homes is increasing. Upsizers are less active in the market, meaning listings for larger homes have risen, up 18% for properties with five or more bedrooms versus a -0.2% fall for smaller one and two bed homes.

Cash is king

Figures from Zoopla suggest almost a third (32%) of purchasers in 2023 (data to November) bought with cash. With cash buyers more active, transaction volumes so far this year have fallen -17% compared with a -30% fall in mortgage approvals.

First time buyers buying

Combining the impact of the end of Help to Buy and higher mortgage rates meant we expected fewer first-time buyers in the market this year. But the latest Q3 figures from the Bank of England show more than a quarter (25.8%) of total lending in Q3 2023 went to first time buyers, the highest since the series started in 2007. Although worth noting that market share is buoyed by a drop off in home movers and investors.

Fewer bricks a-laying

In our latest JLL Residential Forecasts we outline five key challenges for the UK development market. Rising build costs, higher costs of debt (and increases in the risk-free rate), capacity to build, land availability, and regulation all impacting on our ability to deliver new homes at sufficient scale. Over the next five years, JLL predicts the rate of undersupply will worsen further with a cumulative shortfall of 720,000 homes between 2023 and 2028.

(Really belt this one out) Nominal versus real

More bearish forecasters have suggested house prices could fall by as much as -30% peak to trough in nominal terms. Our JLL forecast is more bullish, with non-inflation adjusted falls nearer to -12%. But rather than seeing significant nominal (non-inflation adjusted) price falls we expect higher inflation means that it will be real (inflation adjusted) house prices where falls will be more significant. Of course, this still means prices fall helping with affordability, but means less risk of negative equity, and protects lenders too.

Wages are rising

The latest wage figures show a rise in earnings (excluding bonuses) of 7.3% in the three months to October, with average earnings up 1.3% when adjusted for inflation. Average weekly wages are now 26% higher (in non-inflation adjusted nominal terms) than they were five years ago according to the ONS. Rising wages go some way to cushion the blow of higher rents and mortgage payments but challenge the Bank of England’s 2% inflation target.

Fixed start with a four

Those rolling off longer-term fixed rates have been bracing for higher repayments for some time now. Current rates would still make most wince, but the outlook for fixed rates are improving. Best buy rates for both two- and five-year fixes are now sub 5%, with two-year fixed rates now 100 basis points lower than they were back in July.

(Sung loudly) Pricey gold rings!

The price of gold reached record highs in December, breaching $2,100 per ounce. Money continues to flow into the gold market, with geopolitical uncertainty, the prospect of a weakening of the U.S. dollar and possible interest rate cuts (more likely in the U.S. first) driving investment into gold.

Rents a-cooling

Rental growth peaked annually in November 2022 at 11.1% according to Homelet, with annual growth in rents in double digits for seven of the last 12 months. The latest November figure shows an annual increase of 8.9%, the lowest since March 2022. We expect rental growth to cool a little next year, with our JLL Forecast expecting rents will rise 5% in 2024.

Prices holding up

According to Nationwide house prices peaked in August 2022. 15 months on prices are down -5.5% from their peak and are down -2.0% annually. Rewind back to the Global Financial Crisis (GFC) and prices 15 months from peak were -19.1% down and -16.6% lower annually.

And inflation starting with a three?

Wishing you all a very merry Christmas and all the best for 2024 from all of us here at JLL.

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