住宅

The residential market will face challenges in 2023. This will curb activity and result in moderate price falls in the mainstream housing market. Investment into the sector will remain robust but pricing will adjust to reflect some yield expansion. However, this will be partly mitigated by strong rent growth.

Key Takeaways

1. As home buyers are faced with a more challenging backdrop in 2023, activity in the housing market will reduce. Even so, while we expect sales to fall below their long-run average, the market will avoid a 'cliff-edge' fall in activity.
2. In line with the wider economic slowdown, we expect prices to fall moderately in 2023 and 2024. But stricter mortgage regulations (since 2014) will somewhat insulate the housing market against large scale distressed sales. The absence of such a ‘supply shock’ should prevent a significant fall in prices.
3. In contrast, the rental sector will remain extremely strong. The challenges faced in the sales market will boost the already strong occupier demand for Build-to-Rent (BTR) and Co-Living. This strong rental growth will also partly mitigate yield expansion across the sector.
4. Driven by an acute supply and demand imbalance, rental growth will continue to be strong in 2023. Wider inflation may also push up rents, particularly for renters with inflation-linked tenancy agreements. However, operators have a duty to their tenants and will need to be extremely sensitive of the increased cost of living.
5. Investment appetite for Build-to-Rent and Co-Living will remain strong. However, pricing will adjust to reflect the higher interest rate environment. The challenging sales market will present opportunities for single-family Build-to-Rent investors. However, high build cost inflation will continue to hamper forward-funding viability in early 2023.

Housing market momentum to slow

The housing market will undoubtedly be turbulent in 2023 as borrowers, who already face a significant increase in their cost of living, will find it more difficult and more expensive to get a mortgage. Mortgage rates increased steeply in the second half of 2022, and will continue to rise in 2023, in line with further base rate rises from the Bank of England. Moreover, the number of mortgage products dropped sharply following the mini-budget on 23 September 2022. Although this has since recovered, the number of fixed rate mortgages available is still 30% below the pre-budget level.

Favourable changes to Stamp Duty thresholds will be in place until 2025, meaning buyers will save some money on their upfront costs. Although, this measure will not dramatically incentivise activity, and any savings will be quickly eroded by higher borrowing costs.

As a result of the more challenging environment, we expect a smaller potential buyer pool in 2023. This may be compounded by the end of Help to Buy scheme that, on average, has facilitated the sale of 40,000 homes a year since its inception in 2013. Although not everyone using the scheme necessarily needed to, we identified that it’s absence could result in afall of 25,000new home sales per year going forward.

Figure 17: Mortgage stress test and approvals

Source: UK Finance, Bank of England

Taking all the factors together, we expect sales volumes to fall below their long-term average. Still, the economic backdrop is far more favourable than during the Global Financial Crisis, during which time home sales still averaged around 730,000 p.a.

The housing market should be somewhat protected against the higher interest rate environment, due to the stricter mortgage regulation brought in after the Global Financial Crisis, which required borrowers to be ‘stress tested’ at interest rates of around 7%. Although the regulatory requirement has been scrapped by the Bank of England, individual lenders are still enforcing their own stress testing.

These tighter regulations mean that existing owners should still be able to meet their mortgage repayments, and pressure will ease once inflation comes under control. Lenders will also offer flexibility to make repossession an absolute last resort. As such, the level of distressed sales should be minimised, so there won’t be a ‘supply shock’ to the market. This should keep a floor under prices.

That said, the broader economic outlook creates the conditions for a moderate fall in house prices. By historic standards however, this recession is forecast to be relatively moderate. The current forecast for the unemployment rate is also much lower relative to previous recessions. On balance, we forecast that UK house prices could fall by 3% in 2023, and a further 1% in 2024. We then forecast a strong bounce-back as the economy recovers and lower inflation allows interest rates to be brought back down.

Build-to-Rent sector to remain firm, but pricing will adjust

The difficulties faced in the sales market will support continued growth in the rental market. For example, with no Help to Buy scheme and higher borrowing costs, many potential first-time buyers will remain in the rented sector. This will sustain what is already, an extremely high-level of tenant demand.

In 2022, high demand significantly outweighed supply, resulting in record levels of rent inflation. This is also partly due to headline inflation being passed through to tenants. Both of which will continue, and we forecast strong rental growth of 4% in 2023, rising to 5% in 2024. These are whole of market forecasts, and the Build-to-Rent sector has the potential to outperform this. That said, operators have a duty to their tenants and will need to be extremely sensitive of the increased cost of living.

In terms of the investment market, demand for Build-to-Rent across both the multifamily and single-family sector, will remain strong. However, yields are likely to expand given the broader interest rate backdrop, albeit this will be limited to an extent by strong rental growth. The more challenging sales market will present further investment opportunities, particularly in the single-family space where housebuilders look to de-risk schemes. Still, until build cost inflation falls and stabilises, the viability of forward funding transactions will remain challenging.

Figure 18: Net tenant demand and change in rent

Source: RICS, ONS

Co-Living momentum to continue

Co-Living will continue to gain traction in 2023. More schemes are now complete and operational, which is providing evidence to underpin investment appraisals. Moreover, reflecting the general trend of extremely high tenant demand, completed Co-Living schemes have leased up quickly and are recording high occupancy rates. This is providing further comfort to existing investors and those looking to enter the market.

In ourrecent report,我们强调政策H16伦敦计划has helped to formalise the Co-Living tenure within the capital. The outcome of the space standards consultation as part of this policy is also due in Q1 2023. This should provide further clarity for the sector from a planning perspective. Given high build cost inflation and onerous S106 payments, the repositioning of existing assets (such as hotels and hostels) to Co-Living will remain an attractive feature of the sector in 2023.