“The first homebuyers returning to the market will assess a balance of the price they can buy at, as well as the interest rate they can secure. With this in mind, could now be the optimum time to buy?”
The UK housing market defied expectations this year, embarking on a rollercoaster ride that flouted initial forecasts of a sustained upward trajectory. As the year progressed, the market entered a period of consolidation, with house prices gradually cooling and mortgage approvals declining. This shift was attributed to several factors, including the Bank of England’s aggressive interest rate hikes to combat inflation, growing economic uncertainty, and lingering concerns over affordability.
The cooling trend was particularly evident in the property market’s key driver: demand. The number of house sales completed in the UK fell sharply in the first half of 2023, with activity subdued across all property types. This slowdown was driven by reduced affordability as interest rates rose, prompting potential buyers to reassess their purchasing power. Moreover, the lingering impact of Liz Truss’ mini budget, particularly within the mortgage market, further dampened consumer confidence and purchase decisions.
However, while the market has certainly experienced a challenging year, it’s not all doom and gloom. Despite the various pitfalls and less-than-optimal market trends, 2023 concluded on a much stronger note, with a sense of increased confidence for the year ahead. This was a direct result of positive purchase activity from committed buyers, who were driven back into the market due to increased clarity on interest rates peaking and plateauing.
Let’s take a look at the various factors impacting the market in more detail, and how they should set us up for a much more optimistic outlook in 2024.
Bank of England base rate changes
Amidst the persistent inflationary pressures that have gripped the UK economy, the Bank of England has actively pursued money-tightening measures to rein in price growth. Throughout 2023, the bank rate has risen steadily, but it’s nothing like the sudden and persistent increases we saw in 2022.
Average residential two-year fixed rates saw their peak of 6.86% on 26th July, compared to the 2.52% seen on the same date in 2021. This was the highest average rate seen for two-year fixed rates since after the credit crunch in August 2008 (6.94%).
During this period, sub-5% fixed rates became a unicorn in the mortgage market for months, with lenders not bringing them back onto the market until November.
At the very start of 2023 (the first two days of the year, in fact), the UK saw the lowest availability of mortgage products on offer, at just 3,643. In November, the market balanced out, with almost 5,900 products available (the highest amount seen in 15 years). This is a clear indication that lenders have begun to see more positive shifts in the industry, and are reacting accordingly.
Furthermore, while the bank rate has held for a third consecutive time at 5.25%, it’s still the highest it’s been in 15 years, and this signifies a firm resolve to bring inflation back to the government’s target of 2%.
On 21st December, interest rates for fixed rate mortgages continued to drop, with the first sub-4% fixed rate of the year released. As part of their latest round of product rate cuts, specialist mortgage lender, Gen H, released a five-year fixed rate mortgage with a 3.94% interest rate.
It doesn’t stop there, either, with an increasing number of mortgage products with reduced interest rates becoming readily available. There have already been some more fixed rate reductions by lenders in the first week of January, and this should continue in what is shaping up to be a fast-moving market. For example, there are now a number of two-year fixed products around the 4% mark, as well as five-year fixed rates with higher LTVs. While these rates are nonetheless much higher than many customers will have been used to, it is yet another positive sign for 2024 market performance, and a key indicator that lenders will continue to follow suit in reducing rates.
Inflation
2023 was marked by an upward trend in inflation, with the Consumer Prices Index (CPI) reaching a peak of 6.7% in September 2023. This marked a significant increase from the pre-pandemic level of around 2%, and represents the highest annual inflation rate since March 1992.
The rise in inflation had a significant impact on households in the UK, with the cost of living crisis continuing to make it increasingly challenging to make ends meet. The government has introduced a number of measures to help households cope with the crisis, such as increasing the National Living Wage and providing support with energy bills.
However, in November, UK inflation fell from 4.6% to 3.9%. The main reason given for this fall was a drop in the price of petrol, as well as a slowing in costs for food items and household goods. While this has been heralded as a welcome decline, the Bank of England’s target of 2% inflation is still a long way off.
Despite this, this drop in inflation and the potential for further decreases in the coming months is good news for homeowners. As inflation continues to fall, it’s also likely that the Bank of England will continue dropping the base rate, which should lead to lower mortgage rates and cheaper products.
Looking ahead to 2024
There’s no getting away from the fact that 2023 has been a year full of surprises – some welcome, some less so. As we look back on all that has happened, we can clearly see the resilience of the mortgage sector, and how it has now shaped up to be a retention market. Recent signs have shown that two-year fixed rates are now available at under 5% and even some at 4%, which are some of the lowest rates that we’ve seen since Liz Truss’ reign as Prime Minister.
The key takeaway from this is that the continued improvement in pay rates – despite there being no short-term reduction in the Bank of England base rate – will only further fuel interest from homebuyers that have been adopting the ‘wait and see’ approach. It should drive those customers who are keen to secure properties before the market starts to officially bounce due to significant pent-up demand. Ultimately, the first homebuyers returning to the market will assess a balance of the price they can buy at, as well as the interest rate they can secure. With this in mind, could now be the optimum time to buy?
As we anticipate a more buoyant market over the following 12 months, adopting a proactive mindset is essential to broker success. Taking advantage of every opportunity that the next year brings our way, means that we will continue to thrive – in our respective businesses, as an industry, and across the market.
