Key points to mention…

• Annual house price inflation is 5.3% down from 8.6% last year.
• Buyer demand and sales volumes are 20-50% lower than a year ago but slightly ahead of the pre-pandemic years.
• Sellers are having to accept an average 4.5% discount to the asking price to achieve a sale which is the highest its been in 5 years.
• Average discount to asking price is just above £14,000 meaning sellers are having to loose a third of their pandemic house price gains.
• UK house price inflation likely to move into low negative by summer.
• Market is still on track for a soft landing with modest price falls of up to 5% and 1m sales in 2023. This is better than predicted last year.

Activity levels are strong in a more affordable property market

While sales volumes are lower year-on-year, they are still ahead of the pre-pandemic years in more affordable housing markets such as the North East and Scotland. This is because higher mortgage rates have less of an impact on demand in lower-value markets. Sales volumes in the Midlands and southern England are up to 9% lower compared to the pre-pandemic period. Higher house prices, which have grown substantially over the last 3 years, mean a greater impact on buying power and levels of demand from would-be buyers.

While sales volumes are recovering, sellers are having to accept lower offers to secure a sale. In our opinion this was due to over-inflated asking prices by sellers and estate agents, this may well have been overvaluing tactics used by agents as they were battling it out with less supply of properties.

The latest data from Hometrack shows that the discount to achieve a sale has increased over the last 5 months and currently stands at -4.5%, on average £14,100 per property sale. Discounts to asking price are larger than in the pre-pandemic years and reflect the rapid transition from 2020-2022 where most buyers had to pay the asking price or above. As previously mentioned, we feel this was created from over valuing by both sellers and agents, not keeping it realistic.

Supply levels are rising

Slower sales rates and a steady flow of new properties being listed have boosted the stock of homes for sale by over 60% compared to year-on-year. The average estate agent office has 24 homes for sale compared to just 15 a year ago. This creates more choice for home buyers and investors who now have more room to negotiate on price with less competition. 35% of homes currently listed for sale on Rightmove have seen their asking prices drop to attract buyers. These adjustments have been vastly uniform across regions and property type. However, there are still areas of England going against this (North East & us here on Isle of Wight as an example).

A reset in house prices is underway

Buying power is starting to recover as mortgage rates fall from their 6% highs of late 2022. However, its important to note the market still increased by 1% last month.

At 4% mortgage rates, the average home buyer has 20% less buying power than they did a year ago when mortgage rates were significantly lower. This won’t affect the market immediately, its likely to take effect on the market to the second half of 2023.

Zoopla house price index is now registering monthly price reductions which have dragged the annual rate of inflation lower to 5.3%. Realistically its likely to record further price reductions of up to 2 or 3% by the end of summer.

Regionally, the annual growth rate ranges from +2.5% in London to +7.1% in Wales. The real weakness in price inflation is coming through parts of southern England where high house prices compound the impact of higher mortgage rates on buyers. In the North East we are still seeing strong growth month-on-month.

Is the glass half-full or half-empty

You could look at the property sales market in two ways this month, when comparing to year-on-year. The glass-half-empty view would be to compare this year to the extreme market conditions we saw a year ago. The glass-half-full view would compare the current sales market to the pre-pandemic years (2017-2019) when activity levels and house price growth were steady and trading conditions were tougher.

Zoopla data shows demand from home buyers has rebounded in the first two months of this year, however remains at half the level recorded a year ago. New sales volumes in early 2023 have also recovered, based on the usual seasonal upturn we see each year.

The current property market is more comparable with the pre-pandemic years with demand 8% higher and sales agreed up 1%. For property investors & businesses this is a more realistic benchmark to work from.

Going Forward

It's great to see that the housing market is adjusting to the higher average mortgage rates better than anyone thought. It's unlikely that the mortgage rates will get much cheaper now in our opinion, however competition between lenders remain strong, so potentially we could see further change throughout the coming months.

Pricing is becoming more realistic. With the average seller considering taking 4.5% below asking, balances out the increased mortgage rates and still leaves the housing market strong in comparison.

If the market delivers 1m to 1.1m sales in 2023, as is expected, then it will be a very positive result for the property world.