April 21st, 2023

Assetz Capital on the UK Housing Market from 2022 to 2023

As featured in The April 2023 edition of The Intermediary magazine.

By Stuart Law, Founder and CEO of Assetz Capital

The UK housing market experienced a rollercoaster ride in 2022, with soaring prices initially, followed by a slowdown and then even a modest fall in prices towards the end of the year, into the beginning of 2023. As we start to see more data on the year ahead for 2023, the market seems to be adjusting to new economic factors. These include the impact of higher interest rates, with perhaps the end of those rises now in sight, and also concerns over affordability, but with those beginning to fade as inflation fears also recede.

It certainly looks at present like 2023 may turn out to be more benign for the UK housing market than assumed late in 2022 when the mini-budget nearly derailed everything. Certainly, the Savills forecast price drop of 10% for 2023 isn’t one we presently see reason to think will come to pass.

Development lenders watch all of the data closely and get some comfort from the consistency of plot sales completions that continued through all of this noise.

The government’s extension of the stamp duty holiday and various incentives for first-time buyers, such as the Help to Buy scheme, contributed to the heightened activity. These factors, coupled with low mortgage rates, fuelled a sense of urgency among potential buyers, causing a surge in demand that outpaced the available housing stock. Whilst those heady days are over, we certainly continue to see demand as a relative strength in a world of low supply, that at least supports prices, if not lifts them, in 2023.

In terms of other trends to watch this year we expect costs to probably continue to rise for many building materials. However, supply and demand drive most prices and with slightly slowing new build market volumes, with national housebuilders pulling back on plot starts, both price rises and price falls could be seen this year according to the material. Some overstocked materials could fall in price to help reduce stock levels in a costly higher interest rate environment that penalises full warehouses. Equally some materials may see oversupply versus reducing national house building volumes and see suppliers cut prices to compete for a smaller market. Other products, with tightly controlled supply or growing demand, could hold their elevated prices regardless. Suppliers can be quite resistant to handing back price increases now achieved and this will be a drag on any deflationary effects. We don’t expect labour costs to fall at all and further rises are inevitable with such a significant labour shortage following both the pandemic and Brexit. Until factory-built homes become a major component of the UK housing stock supply we don’t expect this situation to change as the borders are firmly closed.

Energy bills look like they will have fallen quite a bit from the peak by the end of 2023, easing household budgets and helping support housing demand and mortgage affordability again but we live in a time of risk of further shocks and so we can’t be certain that this will play out.

We can see huge demand for air-source and even ground source heat pumps from new home buyers and that has now extended into growing demand for solar and home battery systems now too. Just because energy prices will likely have fallen back somewhat this year, housebuilders need to stay with the plan and get their homes increasingly energy efficient, not just for legislation reasons but for sales demand reasons too and SME housebuilders should use this, and other technology, as a competitive edge against the nationals.

Development finance surged in cost after the mini-budget debacle and doesn’t look like it will fall back any time soon and SME housebuilders are often facing pricing that is above 10% per annum now. This looks like the new normal though and rates could remain at this level for quite some time. It certainly adds to the challenge of maintaining house building profit margins though when combined with energy efficiency equipment costs, labour and material inflation and increasing legislation challenges.

As the UK housing market transitions from a year of robust growth in 2022 to a more muted outlook for 2023, the sector must adapt to the evolving economic landscape. It remains crucial for housebuilders to be careful with their budgets, factor in a degree of continued inflation and some healthy contingencies to navigate this period of change successfully.