In 2023, the housing market demonstrated unexpected resilience, as highlighted by Nationwide. Despite facing challenges, the market has not fully recovered, and prospects for 2024 remain tempered due to the persistent influence of high-interest rates. Throughout the year, housing market activity remained subdued, with the total number of transactions consistently running at approximately 15% below pre-pandemic levels over the past six months.
A notable trend emerged in the type of transactions, with mortgage-related activities experiencing a more substantial decline, around 25%, primarily attributed to the impact of elevated borrowing costs. In contrast, cash transactions defied the overall market trend, surpassing pre-Covid levels during the same period. This nuanced landscape, as explained by Robert Gardner, Nationwide’s chief economist, suggests a complex interplay of factors shaping the housing market dynamics in the coming year.
The housing market’s subdued state is mirrored in house prices, registering a 2% decline in November compared to the same period in 2022. This decline extends to 4.3% below the all-time high recorded in late summer 2022. Despite the modestly lower house prices and the backdrop of rising incomes, particularly in cash terms, there is a persistent challenge. The impact of elevated mortgage rates, still more than three times the 2021 record lows post-pandemic, continues to exert influence.
Despite the ongoing decline in house prices and the upward trajectory in incomes, housing affordability remains a pressing issue. Higher mortgage rates have played a significant role in keeping affordability stretched. Borrowers earning the average UK income and considering a typical first-time buyer property, even with a 20% deposit, face a monthly mortgage payment equivalent to 38% of take-home pay. This figure stands notably above the long-run average of 30%, signaling the enduring challenge of balancing housing affordability with market dynamics.
As the market grapples with these challenges, prospective homebuyers find themselves in a complex landscape. The decline in house prices, while a notable trend, is counteracted by the lingering impact of elevated mortgage rates. This delicate balance underscores the need for a nuanced approach to housing policy and market dynamics. The interaction between market forces and financial factors remains a critical aspect shaping the trajectory of the housing market and influencing the decisions of potential homebuyers.
Looking ahead to the next year, Gardner observes some positive signs for potential buyers as mortgage rates have slightly decreased. Investors are more optimistic, believing that the Bank of England has already increased rates sufficiently to bring inflation back to the target, anticipating future rate reductions. This shift has influenced longer-term interest rates, impacting fixed mortgage rate pricing.
Despite these developments, a swift recovery in activity or house prices in 2024 seems improbable. While the pressure from the cost of living has alleviated, with inflation now trailing average wage growth, weak consumer confidence and subdued levels of new buyer inquiries reported by surveyors persist. Additionally, though market expectations point towards a potential decrease in the Bank Rate, there remain upward risks to interest rates. Despite a decline in inflation, indicators of domestic price pressures continue to remain unacceptably high.
“It appears likely that a combination of solid income growth, together with modestly lower house prices and mortgage rates, will gradually improve affordability over time, with housing market activity remaining fairly subdued in the interim. If the economy remains sluggish and mortgage rates moderate only gradually, as we expect, house prices are likely to record another small decline (low single digits) or remain broadly flat over the course of 2024.”
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