Lloyds bank CEO says UK housing prices will slip by 10% this year — explained

According to Lloyd’s bank's forecast, the United Kingdom is braced to face its longest recession on record.

January 20, 2023
Lloyds bank CEO says UK housing prices will slip by 10% this year — explained
Matt Crabtree

Written By

Matt Crabtree

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The housing market in the United Kingdom has been stagnant for the last several months as the strained Bank of England has been actively raising interest rates to combat inflation in the double digits.

According to Lloyd’s bank's forecast, the United Kingdom is braced to face its longest recession on record.

Lloyds Bank Chief Executive Officer Charlie Nunn said on Tuesday that property values in the United Kingdom might fall by as much as 10% this year due to rising mortgage rates and the wider cost of living problem.

Lenders pulled roughly 40% of all mortgage products from the U.K. market due to fears over skyrocketing interest rates after the catastrophic “mini-budget” introduced by former prime minister Liz Truss in September, putting a strain on the housing market.

The housing market in the United Kingdom has remained stagnant in recent months as the Bank of England has continued to aggressively raise interest rates in an effort to rein in double-digit inflation. According to their findings, the current economic downturn would become the longest on record.

The Bank's key rate went from 1% to 3.5 % in only nine policy sessions as inflation reached 10.7 % in November. To put it simply, more hikes are on the way.

Nunn predicts a mild recession

For the first time in two months, asking prices for houses in Britain rose in January, according to a study released by property website Rightmove on Monday.

According to Nunn, speaking on the sidelines of the World Economic Forum in Davos, Switzerland:

His best estimate for 2023 is that we will experience a recession — a mild recession, with GDP of about -0.1% this year, joblessness remaining strong (mostly due to supply-side constraints), interest rates around 4%, and a recovery coming into 2023.

He noted that some 8-10% depreciation in home values is expected this year, which is the other concern a lot of our consumers are concentrating on.

The independent Office of Budget Responsibility (OBR) predicted that household income in the United Kingdom will drop more dramatically than at any time in history. Lloyds, the United Kingdom's biggest retail and commercial financial services firm, has a “story of two tales,” as CEO John Nunn stated.

According to Nunn, first off, the rising cost of living is likely to be a problem for a sizable but often overlooked subset of mortgage holders and renters alike. That's around one per cent of our potential UK clientele, therefore we need to give them special attention 

What he had to say was there is real perseverance in companies, homes, and people at the greater income levels in the U.K., and powerful spending we are witnessing despite the fact that we are seeing a far bigger sample of consumers having to adjust their spending and adapt to both greater costs of living and greater mortgage spend.

UK housing costs cresting as mortgages and living costs jump

The ripple effect of weakened supply chains, Covid, international debt, and geopolitical tensions have had an effect worldwide. 

Companies including Amazon, Meta, and UK banks had to lay off large numbers of workers as a result of rising interest rates, falling consumer demand, and a downturn in China's economy.

British housing costs peaked in November 2022

The average price of a property in the United Kingdom was now almost £33,000 more than it was in March 2021, at £265,312. There was a general trend of rising costs throughout the nation, with prices in Wales rising by 15% in the last year alone. The increase in house prices in every part of England and Scotland quickened.

In 2022, prices of detached houses climbed by about £68,000, or 22%, as more individuals choose to work from home and want more space. Meanwhile, the average price of an apartment has risen by £24,000, or 14%.

The economic impact of the epidemic produced a significant dip in activity, yet it hasn't stopped the almost constant climb in home prices.

The housing market, on the other hand, had been propped both by government wage support programmes and by people's ability to save during shutdowns. Nationwide predicted that families were able to save £190 billion more than was anticipated before the epidemic, or £6,500 per family, but unevenly distributed.

Stamp duty reductions were another government intervention that subsidised the housing sector and kept prices soaring when the market thawed.

2023 shows slow reversal, with some returns

2023 outlook — official statistics indicated that UK home prices fell from their record high in November, adding to signs that the market may be beginning a more sustained decline.

As reported by the Office for National Statistics on Wednesday, the average price of a property in the United Kingdom dropped to £295k in November, down £1,000 from the previous month but £28k more than a year earlier.

There has been a prolonged decline in mortgage prices based on lender loan portfolios dating back to 2008, according to data collected over the last four months. While the ONS data trails the market by a few months since it only includes closed transactions, it is more comprehensive.

According to ONS statistics, annual home price growth slowed to 10.3% in November from 12.4% in October.

Rising mortgage rates as a result of the Bank of England's rapid increases in its benchmark interest rate have caused people to hoard cash in response to the cost-of-living squeeze. The ONS reported that rental prices increased to an all-time high last month.

Property listing website Rightmove released statistics last week showing that asking prices for British properties dropped in both November and December, but that sellers had started to raise their expectations again in January.

The Bank of England has tightened its monetary policy at the fastest pace in three decades by raising interest rates at each of its previous nine meetings.

Inflation was reported at 10.5% this morning, five above the BOE's 2% goal. The main rate at the central bank is widely anticipated to be raised by another 50 basis points in the next month.

Both the Nationwide Building Society and Halifax expect home prices to drop by 5% this year. Bank of America's analysts says a 10% price drop from peak to trough, with the year's conclusion likely marking the nadir.

In England, the average home cost is now £315,000, whereas in Wales it is £220k, in Scotland £191k, and Northern Ireland's is £176k.

House price rise in London has been among the highest in the nation historically, but the epidemic slowed the market as potential purchasers sought properties outside of the city during lockdowns.

When comparing yearly home price increases across regions of England in the 12 months ending in November, the North West had 13.5% rise while the capital saw 6.3% growth.

Will house prices drop in 2023, UK?… (Should I buy a house now or wait until 2023?)

After increasing by around 9.5% in 2022, UK home prices are predicted to decrease by 3.5% the following year, in 2023. Despite increased mortgage rates, S&P forecasts that the European property market would droop rather than collapse.

The numbers indicate that home values are beginning to drop. It is anticipated that 2023 would bring an even steeper drop. Several factors contribute to this: Since the end of 2021, interest rates have been rising from their historic lows, increasing the cost of mortgages and dampening demand in the housing market. 

Where are British home prices headed?

There is still some life in the property market, and prices have risen over the last year. However, this pace of housing price increase has slowed, and in some cases even reversed, as a result of rising mortgage rates and the cost of living crisis's impact on family budgets.

Over the last year, the number of agreed sales of newly listed properties has dropped by 28%, while demand for houses has dropped by 50%, as reported by Zoopla. The number of people looking to buy a property has dropped by half compared to this time last year, forcing sellers to offer discounts of about 4 per cent to attract buyers.

The website's research showed that rural housing values dropped the greatest, countering the increase in demand for rural properties seen as people fled cities during the epidemic.

Is it better to buy a house when interest rates are high?

When borrowing rates are high, is it a good time to purchase a home? Not only does your interest compound when interest rates are high, your capacity to afford mortgage payments increases when interest rates rise. Despite appearances, there are advantages to purchasing during periods of rising interest rates. 

There are fewer people on the market for a property, which lowers prices, increases buyer options, and perhaps lowers buyer risk.

Timing real-estate — Should you buy a house now or wait?

The market is wondering: What is the best month to buy a house UK, what is the best year? When is the best time to purchase a house?

Homebuyers, particularly those on a tight budget, may be holding out hope that housing prices will continue to decline.

The Bank of England is attempting to rein in skyrocketing inflation by raising interest rates, which are now at their highest level since 2008.

Higher interest rates on loans have a chilling effect on consumer demand.

Saving money on the home's purchase price could be offset by higher mortgage payments in the long run.

Since a lengthy recession is likely, fewer homeowners will be willing to sell their homes.

Some homeowners have already begun showing signs of hesitating before making their next relocation. This is in part because there aren't enough homes on the market to move up the ladder, and in part because they aren't sure they can afford the next step.

Despite showing remarkable resilience throughout the epidemic, the real estate market is starting to show indications of slowing down as a result of the associated price increases.

If you're hoping to purchase a home in the near future, you may want to think about how you'd react if prices dropped significantly, as is forecasted to happen over the next two years. Could you end yourself in the red (negative equity) if the value of your deposit were to drop?

Your individual situation will determine if now is a good time to purchase or whether it's better to wait. We'll go through the pros and cons of waiting to buy a home in the following part.

It can make sense to purchase now if you know you can afford the monthly mortgage payments. This is especially true if you want to actually live in the house, rather than just flip it for a quick profit, since you would be at the mercy of a market whose values may not bounce back anytime soon.


So, where do we see mortgage rates going?

Since mid-December, the Bank of England's base rate has been set at 3.5% in an effort to curb inflation.

Home loans have become much more costly as a result of this, the ninth rate increase in a year. It’s more important than ever to have an emergency fund.

In 2023, the base rate of the Bank of England is projected to reach a high of 4.75 per cent. Accordingly, mortgage rates should rise during the next year.

You should anticipate your monthly payments to rise if you are about to leave a fixed-rate mortgage contract and start shopping around for a new one.

About 20% of all mortgages have variable interest rates, so if the base rate goes higher, those borrowers would notice an instant increase in their monthly payments.

Have a look at our top savings accounts

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