Property in an economic downturn: what opportunities and risks might exist?

Edited highlights:

• How is the current macro-economic climate affecting the housing market?

  Sandra: Although we saw significant economic recovery post-Covid, the growth peak is now behind us. Meanwhile, we have an extremely tight labour market, double-digit inflation and global tightening of monetary policy, with interest rate rises being implemented by central banks almost without exception.

  As far as the UK housing market is concerned, the introduction of stamp duty cuts in the mini-budget will support first-time buyers and will have positive repercussions throughout the wider market. But there are significant affordability constraints as a result of sharply higher mortgage rates; we expect about half of all mortgage holders to have to refinance by the end of next year.

• Where are some of the opportunities in the property market at the moment?

  Aneisha: There are areas of the market that may weather economic turbulence better than others; we think Prime Central London will hold its value, especially as the weak pound is going to encourage international buyers back into the mix.

  Buy-to-let investors and landlords are at risk, particularly those who may be coming up to remortgaging. In some cases, the sums on buy-to-let property will no longer stack up, particularly in low-yielding areas in parts of the south of England. Therefore, it’s likely some of those landlords will be forced to sell those properties, which could present an opportunity for others.

• What risks do you see in the property market at the moment?

  Aneisha: First-time buyers will be hit the hardest. People saving up to buy a home are facing a triple whammy of rising rental costs, the increased cost of living making it harder to save, and the impact on affordability of rising mortgage rates.

  People who already live in their own home are in a better position as they will have already accrued equity in that property. People typically stay in a home for a minimum five years before moving, meaning that even if we see a dip in prices over the next year – which is looking increasingly likely – most of these movers will still be selling their homes for more than they bought them for.

• Are there any locations that you see as being particularly vulnerable during the downturn?

  Aneisha: The areas that are most vulnerable to price falls are those that have seen strong price growth in the last two years, namely some of the Northern and Midlands regions where we have seen particularly sharp growth in the two years since the Covid pandemic. These are also areas where borrowers tend to have higher loan-to-value mortgages, making them more susceptible to interest rate rises.

• Are we heading for a recession and what could this mean for the property market?

  Sandra: We’re not technically in a recession yet, but think we are going to get there at some point during 2023.

  That leads to the question of when the economy will recover, and we think that’s going to take some time. Although the rate of inflation will be closer to the Bank of England’s target by the end of next year, it won’t be there yet.

  There could be a fall in transaction volumes because of affordability issues.

  You have to bear in mind, though, that house prices need to be compared to the prices of everything else in the economy. With inflation currently at 10%, if prices stay where they are then the relative price of housing might fall. If this is the case, the declines may be less severe than some are fearing.

• What's happening in the property market at the moment?

  Aneisha: So far things are steady. That said, most of the people buying today will have had their mortgage offers granted a couple of months ago so might be paying rates of around 2-3%; they won’t be paying the 6% rates that have been advertised more recently. We won’t see the impact of what’s happened over the last few weeks until December, or even early 2023.

  Currently, Hamptons’ data shows that demand is still there. The number of applicants registering to buy a property is sitting somewhere between 2019 and 2021 levels – and 2021 was a particularly strong year.

  In terms of house prices, up until early October the average seller sold their property for more than 100% of their asking price. It’s only very recently that we’ve seen that average dip slightly to 99.9%.

  In September our house price forecast predicted prices to stagnate in 2023 based on mortgage rates reaching 4%. Today, mortgage rates are considerably higher than that, which increases the chances of prices falling next year.

• What are you seeing happening in the buy-to-let market?

  Aneisha: Buy-to-let investors have been hit hard over the last couple of years due to tax and regulatory changes. We have seen a lot of landlords sell; there are around 300,000 fewer privately rented properties in England today than there were in 2017.

  The further mortgage rates increase, the higher the likelihood that landlords will be forced to exit the market.

  In some cases, we're seeing landlords sell lower-yielding properties and repurchase higher yielding properties. However others are taking more of a long term view, and in places like Prime Central London, where yields have risen, some investors are looking to seize opportunities.

• What’s the outlook for homeowners who are looking to sell at the moment?

  Aneisha: People are definitely being more cautious.

  We're also seeing quite a lot of downsizers come onto the market. With energy bills rising, some people who live in larger homes want to bring their bills down by moving to something more economical.

• And for those people looking to buy a home right now, is it the right time? Is there ever a right time?

  Aneisha: A lot of people are asking us that question, and I'm not sure there's ever a right time! It all depends on the financial circumstances.

  We may see interest rates rise further over the next year, but there’s a chance they might start coming down late 2023 or early 2024. So, although there may be short-term pain on a variable-rate mortgage, they might be more favourable in the long term.

  The thing to consider is that even if prices fall a bit next year, it won’t necessarily be more affordable to buy, because mortgage rates may have gone up further. Ultimately, though, if a buyer planning to live in the property for a while, it’s more likely they’ll be able to ride out any storm. But I'd be far more cautious about flipping property right now.