Hello readers,

I can’t believe another year has passed already and what a rollercoaster of a ride it has been.

December is always a time for reflection and before looking to what 2023 could bring, I have been spending some time looking at the article I wrote back in December 2021 and here are the main points compared to reality:

• 3% – 5% house price growth – November saw annual house price growth of 7.8%, beating this prediction dramatically!
• 2.5% rent growth – Annual rental growth as of the December Zoopla report was 12.1%
• Continued strong demand – It’s been a year of two halves here, with demand in the second half of the year dropping dramatically to …?
• Renters reform bill – This appears to have largely stalled, but been drawn into the levelling up paper
• EPC grade C decision – I think we all know the answer to this one. Time is running out for the drive to hit existing tenancies by 1 April 2025 for sure!
• Interest rate rises – Can you believe last December’s BoE base rate was 0.25%? The latest rise has brought that up to 3.5%!
• Regulation of property agents & landlords – I certainly think this one is coming, but it doesn’t seem to have moved much over the past year

This brings us to 2023… recession, increased interest rates leading to high mortgage rates contributing to a drop in house prices, squeezed margins, a potential further contraction of the rental market leading to strong rental demand and more. It’s certainly going to be an interesting year!

Here are the main headlines for 2023:

House prices to fall by around 9%

The increased cost of borrowing, soaring inflation and cost of living crisis will lead to a continued drop in demand (currently 47% down on the four weeks to 20^th November compared to the same period for 2021).

With house prices having soared over the past few years, a drop by around 9% could mean opportunities for investors, but also leave some homeowners finding themselves in negative equity or having to downgrade their aspirations. The graph below outlines how the Office For Budget Responsibility anticipates that house prices will not fully recover until Q1 2028.

Rent growth to slow to 4-5%

Personally, I think 4-5% rental growth is still strong and with the sales market stalling, the rental market is showing different signs.

With so many landlords having exited over the past few years and the current political / economic landscape being uncertain, it’s no surprise that there’s a 38% drop in available rental stock compared to the five-year average.

This demand and supply imbalance along with increased mortgage rates will only lead to increased rents. This is capped however, as the cost of living continues to create a glass ceiling.

BoE base rates to end the year around 4.25%

The worst is yet to come, and predictions are that BoE base rates are likely to hover around the 4.25% mark for most of 2023, only dropping in 2024 as inflation eases.

Check the graphs below which serves to outline these points:

Mortgage rates to hover at around 5%

Yes, it’s bad news for borrowing, as the era of low, low mortgage rates is over, and we can expect to see the 4-5% mark becoming the norm over the next few years.

It will be interesting to see the knock-on impact for limited company buy-to-let mortgages as this could lead to a change in the environment when it comes to the LTV that lenders offer and investors see as standard.

For example, the world of 75-80% LTV buy-to-let mortgages could temporarily be on hold as increased borrowing costs mean that grade of leverage is simply not viable.

An increase in repossessions & distressed sales

What could be seen as something of a toxic melting pot for the property market is likely to lead to an increase in distressed sales.

I personally think that this will largely be realised as a risk by those who purchased during the stamp duty holiday before it ended in 2021 and took out a two-year fixed mortgage deal.

If you consider that homeowners may have stretched themselves on affording the monthly payments at say sub 2% and this rate may increase to around 5%, with the increased cost of living it may mean these homeowners need to sell up and downsize.

We have also seen a 15% increase in repossessions during Q3 compared to Q2 and whilst this is relatively low level (700 in total for Q3), it does show a worrying trend!

This environment creates a challenging situation for homeowners for sure and likely to contribute to an increase in sales needing to be completed.

Increased opportunity for HMOs

Back in October I wrote about how HMOs could be part of the answer as people look for more affordable accommodation over the next few years and certainly think this is likely to be the case.

This presents a significant opportunity for investors, as HMOs tend to generate significantly higher cashflow than single let properties.

It will be interesting to see how the data pans out over the coming years in terms of HMO rooms, but I have certainly seen an increase in enquiries from investors looking to capitalise on this opportunity!

A reminder to maintain a long-term view

To sum up this challenging outlook, I wanted to outline how we have been here before and will probably be here again. The housing market has its ups and downs but it is proven to be strong when investors take a long term view.

Whilst there may be short term pain, there is a good reason to be upbeat and remain optimistic. Us property investors are a resilient bunch, and we will certainly continue to succeed in finding opportunity amidst the challenges!

In closing, I’d like to take this opportunity to wish you a Happy New Year as 2022 draws to an end. I look forward to keeping you updated and informed as we navigate 2023 together!

Hasan