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House prices: Should you buy or sell your house next year?

House prices: A residential street is seen in Notting Hill in central London
UK house prices: Higher borrowing costs have added to stretched housing affordability at a time when household finances are already under pressure from high inflation. Photo: Toby Melville/Reuters

The UK property market has enjoyed a stellar run over the last decade, with house prices rising year-on-year, but during 2022 the cracks started to show.

The sector has recently suffered from soaring household and energy bills, interest rates pushing up mortgage costs, and the impact of Kwasi Kwarteng’s mini-budget in September, which led to the pound hitting its lowest level ever against the dollar.

Higher borrowing costs have added to stretched housing affordability at a time when household finances are already under pressure from high inflation.

Demand for residential properties in Britain almost halved year-on-year in the four weeks to 20 November, while new property sales declined by 28%.

Knowing when to buy or sell property has always been a difficult decision, but now more than ever, the question seems particularly crucial.

Read more: Interest rates: How BoE's rate hike will impact mortgages and house price

Benefits of buying

The biggest reason for possibly buying property in the new year is that house prices are falling, and more sellers are settling for offers below their listing value.

Less buyers are coming to the market overall, so demand is falling and the market is cooling.

According to Halifax this week, UK house prices fell at the sharpest pace in 14 years in November, down 2.3% and the third straight month of decline. This wiped almost £7,000 off the average price, which fell to £285,579 from £292,406.

Meanwhile Zoopla has said that as many as one in 10 homes have already had a price reduction of 5% or more since September this year, with around a third of properties in the South East and East of England slashing prices to attract demand.

Read more: 2022: Year in review

“Once again, the signs are clear that we are seeing a housing market with little fuel left in the tank as the challenges of economic uncertainty and runaway inflation take their toll,” Chris Hodgkinson, managing director of Bureau, said.

“What goes up must come down and as expected, the marked decline in buyer demand driven by over-inflated prices has resulted in a current downward trajectory in values to match diluting demand.”

The stamp duty cuts announced in the mini-Budget will remain in place but only until March 31, 2025. Photo: Getty
The stamp duty cuts announced in the mini-Budget will remain in place but only until March 31, 2025. Photo: Getty

According to Nationwide’s house price index in December, annual UK house price growth slowed to 4.4% in November, from 7.2% in October. Prices fell 1.4% month-on-month, the biggest fall since June 2020, and the equivalent of around £4,500 to £263,788,

Excluding the pandemic, prices have not fallen this sharply since the global financial crisis more than a decade ago. Economists had expected a fall of 0.4%.

The lender warned that the housing market looked set to "remain subdued" in the coming months.

Read more: UK house prices to fall in 2023 amid rising mortgage rates – RICS

Those looking to buy may also benefit from the government’s stamp duty reduction, which will remain in effect until 2025.

Chancellor Jeremy Hunt said at the autumn budget in November: “The OBR [Office for Budget Responsibility] expects housing activity to slow over the next two years, so the stamp duty cuts announced in the mini-Budget will remain in place but only until March 31, 2025.

“After that, I will sunset the measure, creating an incentive to support the housing market and all the jobs associated with it by boosting transactions during the period the economy most needs it.”

The move means the lowest threshold at which homebuyers start paying stamp duty has been raised from £125,000 to £250,000, a saving of up to £2,500.

First-time buyers get additional relief with the price they start to pay stamp duty set at £425,000, so long as the overall property price is below £625,000. This offers first-time buyers a tax saving of up to £11,250. The previous threshold at which first-time buyers started to pay stamp duty was £300,000.

Watch: Will UK house prices ever fall?

First-time buyers also have many benefits still on offer, including the government’s First Homes scheme, Help to Buy equity schemes, and shared ownership.

Marc von Grundherr, director of Benham and Reeves, said: “Further market slowdown is to be expected as a consequence of recent political errors, ongoing economic uncertainty, and the cost of living crisis.

“A gradual reduction in the rate of house price growth should be welcomed, as this will help the market steadily return to pre-pandemic norms rather than falling off a cliff edge. First time buyers will surely be rubbing their hands.”

Benefits of selling

The fiscal fiasco of the mini-budget pushed mortgage rates sharply higher, and added to existing upward pressure on lending rates.

Homeowners have felt the strain in what is already the sharpest cost of living crisis in a century, and many have been looking at selling or down-sizing to cope with costs.

In October, the cost of a five-year fixed-rate mortgage breached 6% for the first time in more than a decade. It hit as high as 6.02%, the highest since February 2010, according to Moneyfacts Group Plc.

This was as the average two-year fixed-rate deal rose to 6.11% after passing the 6% threshold for the first time in almost 14 years.

A handful of British banks pulled their mortgage deals after the mini-budget in September, while others hiked the interest rate on their offers.

Read more: UK average house price drops to £292,598 as market cools

Although it has retreated slightly, interest rates for new mortgages still remain elevated and the market has lost a significant degree of momentum. Continued elevated mortgage rates may push people to sell their homes quicker.

UK mortgage approvals fell by 10% in October, from 66,000 in September to just under 59,000.

“The market looks set to remain subdued in the coming quarters. Inflation is set to remain high for some time and bank rate is likely to rise further as the Bank of England seeks to ensure demand in the economy slows to relieve domestic price pressures,” Robert Gardner, Nationwide’s chief economist, said.

“The outlook is uncertain, and much will depend on how the broader economy performs, but a relatively soft landing is still possible.”

Watch: How does inflation affect interest rates?

As house prices are set to fall further, sellers may also want to get ahead of the decline.

Economists at Pantheon Macroeconomics have forecast a decline of 8% over the next year, while the Centre for Economics and Business Research (Cebr) said UK house prices are expected to fall by 4.5% on average in 2023. However, this is still unlikely to make property more affordable for young buyers.

The Cebr said that next year is likely to be a challenging year for the UK housing sector, with peak annual contraction of 6.2% expected in the third quarter.

But according to new analysis from Interactive Investor, house prices are at their most unaffordable since Victorian times in 1899.

Alice Guy, personal finance editor at Interactive Investor, said: “In recent years, house prices have soared and in 2022 hit 8.5 times the average UK annual salary, compared to 8.6 in 1899, making normal homes even more unaffordable for millions of Brits.

“We’re returning to a time when only the very rich can afford to buy their own home. Only, unlike Victorian times, the wealthy are not only the landed gentry, but those who managed to get on the housing ladder when prices were more affordable, in the 1970s to early 2000s."

Read more: Average house price rises by £33k as costs start climbing again

She added: “For the younger generation, there could be light at the end of the tunnel as house prices are now beginning to falter, dropping back -0.9% in October and -1.4% in November (based on Nationwide House Price Index) and experts predict they could fall between -5% and -10% in 2023.

"Only time will tell, but with interest rates having crept up, it will still be almost impossible for first-time buyers to afford their own home.”

Meanwhile, a study by Bloomberg Economics estimated that house prices may fall by as much as 20% as the Bank of England (BoE) continues to push up the costs of borrowing.

Threadneedle Street has already raised interest rates from 0.1% a year ago to its current 3% level, with further increases expected as soon as next week.

Hodgkinson added: “Many buyers have been faced with increasing mortgage costs and in turn this has applied the brakes to an already stalling market – and so we can expect a tricky time ahead as people struggle with higher all-round costs.”

Benefits of holding

Although the market looks set to slow in the coming quarters, the outlook is extremely uncertain, and much will depend on how the broader economy performs.

If you are able to wait, renting out your property, or spare bedrooms, is likely to produce some good returns.

Tenant demand has continued to rise at a solid pace this year, with a net balance of 46% of Zoopla’s survey participants noting an increase in November.

According to the Royal Institution of Chartered Surveyors (RICS) this week, a net balance of 35% of their respondents reported a pick-up in tenancies in November, with 43% of contributors anticipating rental prices moving higher over the coming three months.

Rightmove said that private rental costs in Britain have risen to record highs amid intense competition for properties. It discovered that rental prices in London were up 16.1% year-on-year, the highest growth of any region since the data began.

Read more: Property demand shifts from buying to renting amid financial uncertainty

Rents are expected to be around 4% higher in a year’s time, with landlords also passing on rising costs of energy bills onto tenants.

Iain Crawford, chief executive of Alliance, said: “Those expecting a housing crash are likely to be disappointed as real estate remains one of the most sensible investments you can make, and even if we see a gradual 5-10% price decline in the coming year – the massive growth seen over the last couple of years should still leave us in good spirits to tackle whatever the coming months may bring,”

The decision on whether to hold or not also depends on location. RICS said its latest feedback was especially downcast in the South East and South West of England, while prices for now continue to edge higher in Scotland and Northern Ireland, albeit at a more subdued pace of growth compared to earlier in the year.

Watch: How to save money on a low income