Cost of living pressures and higher mortgage rates have dented interest from new homebuyers in the second half of 2022.

The spike in mortgage rates to 6.5% after the mini budget caused widespread alarm, given mortgage rates were just 2% at the start of 2022. Housing market activity has stalled since October as buyers and sellers stand back and wait to see what the outlook is like in January 2023.

Many forecasters have put out bearish predictions for 2023, anticipating house prices falls of 8% to 12% and a significant fallback in sales numbers. Most of these projections are based on expectations of high mortgage rates over 2023 and an economic recession lasting into 2024.

While the outlook is less certain and more challenging for a growing number of households, we are more positive about the prospects for house prices and sales volumes in 2023 for 3 broad reasons.

1. Banks are keen and ready to lend

Many people are looking back at history to draw parallels, in particular the 2007-09 downturn. The 12% drop in house prices over this period was driven by a lack of credit, in that few banks were willing to lend to anyone but the safest customers. This reduced demand for homes and prices fell.

Price falls were also amplified by banks loosening their lending criteria in the run-up to 2007. A third of borrowers didn't prove their income to their bank in 2007 when applying for a mortgage.

Things are very different today.

UK banks are very well capitalised and their business plans are subjected to regular testing against major downturns in house prices and economic growth. All our high street lenders are mortgage-focused businesses and they will want to make sure credit is available to those that need it in 2023, albeit with higher mortgage rates than at the start of 2022.

Higher interest rates means banks will become more profitable. For existing borrowers, banks are developing a range of options to make sure customers can afford the jump in mortgage rates as they come to the end of fixed term deals.

2. Mortgage rates are dropping

The other big change in recent weeks has been a fall in the cost of money that underpins mortgage rates.

The vast majority of us take fixed rate loans of up to 5 years. After the fallout from the mini budget, the recent fiscal plan from the government has calmed money markets again. This has seen the underlying cost of mortgages fall back to where it was starting to move to earlier in the year.

This means typical mortgage rates for new borrowers taking a 5-year fixed rate will be in the 4.5% to 5% range at the start of 2023.

Higher loan-to-value mortgages will see the higher mortgage rates while those with the biggest deposits, or the most equity in their home, will get the best rates. This factors in further modest increases in the Bank of England base rate in the short term to bring down inflation.

The other important thing to note about mortgage costs is that every homeowner who took out a mortgage over the last 5 years had to prove to their bank they could afford a 6.5% to 7% mortgage rate, even though they may have been paying just 1% or 2%. This so-called affordability stress test was designed to to make sure buyers could afford higher rates.

This is important, and means the housing market has effectively been operating in the background at 6.5% to 7% mortgage rates. It is another key reason we see evidence of underlying resilience in the housing market. If everyone had been buying based on whether they could afford 2% mortgage rates, house price growth would've been much higher and we would now be expecting much bigger price falls as a result.

3. Motivations to move home remain

The impacts of the pandemic continue to shape the desire to move home. People who expect to work more flexibly are 6 times more likely to move than those that don't expect any change in their working style. The proposals from the government to make flexible working more open to employees will support this trend and further loosen the ties between where people live and work.

The pandemic also brought on a jump in the number of people leaving the labour market for health reasons and retirement, which are big triggers for home moves. Those retiring are more likely to have paid off their mortgage or have a small mortgage, so higher mortgage rates are less of a concern - 30% of sales involve no mortgage at all. Many will be looking to move closer to friends and family or to a better area and a smaller home through down-trading.

The jump in energy costs alongside the general increase in living costs are likely to be compounding the drivers to move. This is particularly the case for those concerned about running costs and the suitability of their current home to meet their future needs.

We expect all of these factors to support home moves in 2023, creating demand for homes listed for sale in the new year. We predict there will be 1 million home sales in 2023, which is down 20% on 2022 levels. New buyers will continue to be price sensitive but many sellers have made sizeable gains in their housing equity, giving them some room for movement if they want to move in the year ahead.

Mortgage lenders have promised to do more to help homeowners who are struggling with their repayments.

The sector has agreed to be more flexible in the way it approaches borrowers who have been impacted by the cost-of-living squeeze.

Alongside offering tailored support to those who run into difficulties, lenders will also enable customers who are up to date with their payments to switch to a new mortgage deal without having to do another affordability test.

In addition, they will ensure highly trained and experienced staff are on hand to help customers when needed.

The pledge was made following a meeting between mortgage lenders, Chancellor Jeremy Hunt, the chair of regulator the Financial Conduct Authority (FCA) and MoneySavingExpert’s Martin Lewis.

Sheldon Mills, executive director of consumers and competition at the FCA, said: “If you’re struggling to pay your mortgage, or are worried you might, you don’t need to struggle alone.

"Your lender has a range of tools available to help, so you should contact them as soon as possible.”

Why is this happening?

Britons were already coming under pressure as a result of high inflation, with steep increases to the cost of food, energy and petrol.

But they are also now facing higher mortgage rates due to a combination of increases to the Bank of England Bank Rate, which has been raised in a bid to tackle inflation, and the fallout from former Chancellor Kwasi Kwarteng’s mini-Budget.

The government called the meeting with lenders as it recognised that many borrowers were concerned about being able to afford increases to their mortgage payments, which for most people are their single largest monthly outgoing.

What help is available?

Lenders

To help those who are concerned about increases to their monthly repayments, lenders have agreed that borrowers who are up to date with payments can switch to a new competitive mortgage deal without having to do an affordability test.

Concerns had been expressed that homeowners may be able to afford a new rate, but they would not be able to remortgage on to it, as they would not pass lenders’ strict affordability tests.

Affordability tests measure a homeowner's ability to repay their loan if interest rates were to rise to levels that are significantly higher than they are today.

Lenders have also agreed to provide well-timed information to enable customers to plan ahead before their current mortgage rate expires.

For those who are struggling, they have agreed to offer tailored support, such as extending the mortgage term to make monthly payments lower, offering a short-term reduction in repayments, or switching borrowers to an interest-only mortgage for a set period of time.

Finally, they will ensure highly trained staff are available to talk to people who have run into difficulties.

The government

For its part, the government has confirmed it will take action to make Support for Mortgage Interest easier to access.

The support offers people on certain benefits, such as Universal Credit, Pension Credit and Income Support, help with mortgage interest payments.

It is also putting record levels of funding into the Money and Pension Service to provide debt advice in England.

The regulator

The FCA has announced that it is launching a consultation on draft guidance clarifying how lenders can support borrowers who have been impacted by the rising cost of living.

It will also provide information for borrowers on the options and support that is available if they are struggling with their mortgage payments.

What should I do if I’m struggling to pay my mortgage?

If you are struggling to pay your mortgage, it is important that you contact your lender as soon as possible.

Banks and building societies work with people who run into difficulties and only repossess their home as a last resort. As detailed above, there are a lot of options available to you.

But you are likely to have more options if you start talking to your lender before you have already missed a payment.

The buy-to-let mortgage market is showing signs of recovery as lenders relaunch products following the chaos caused by the mini-Budget.

The number of different deals landlords have to choose from has increased by more than 700 since the beginning of October, with 1,769 mortgages now available in the sector.

Within the total, the biggest rise has been for two-year fixed rate buy-to-let mortgages for people borrowing 25% of their property’s value, with 139 new deals launched, according to financial information group Moneyfacts.

At the same time, 130 new five-year fixed rate mortgages for landlords with a 25% deposit have come onto the market since early October.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: “The buy-to-let sector has faced notable market turmoil, so it’s positive to see product choice gradually returning since the start of last month.

“A rise in choice could indicate an encouraging sentiment across lenders that appear to be adjusting their ranges to cater to landlords searching for a new deal.”

Why is this happening?

The buy-to-let mortgage sector suffered the same loss of choice as the wider mortgage market in the wake of the mini-Budget, with lenders pulling their ranges to reprice them.

The big increase in choice seen during the past couple of months is good news for those who need to remortgage, as it suggests lenders are very much open for business to this part of the market.

What’s happening to mortgage rates?

Unfortunately, the average cost of a buy-to-let mortgage has continued to increase and now stands at more than 6%.

The typical interest rate charged on a two-year fixed rate deal currently stands at 6.5%, a rise of 0.93% since the beginning of October.

Five-year fixed rate mortgages for buy-to-let landlords have seen a slightly less dramatic rise, increasing to 6.42%, up from 6.05% two months earlier.

Surprisingly, rates for landlords borrowing 60% of their property’s value have seen the biggest increases, with the cost of two-year deals jumping by an average of 1.75%, while five-year ones have risen by 1.68%.

What should I do if I need to remortgage?

Buy-to-let mortgage rates are expected to come down in the weeks ahead, so if you can afford to wait before taking out a new deal, it might be worth doing so.

That said, with house prices currently falling, you may be better off remortgaging sooner rather than later if you are very close to a loan-to-value (LTV) boundary.

For example, if you would currently only need to borrow 60% of your property’s value, but a small drop in house prices would push you above this level into the next tier, it would mean you could be charged a higher interest rate.

If you need to remortgage now, five-year fixed rates for people borrowing 60% of their property’s value currently look the best value, at an average of 5.94%.

But remember, if you take out one of these deals, you will be locking into the current high level of interest rates for five years.

Although the Bank of England base rate is expected to rise further from its current level of 3%, the official cost of borrowing is expected to start falling again within the next two years.

As a result, you may be better off opting for a two-year fixed rate deal, with these currently averaging 6.27%.

For landlords looking to borrow 75% of their property’s value, the difference is much smaller, with five-year deals averaging 6.55% and two-year ones averaging 6.53%.

Anything else I need to be aware of?

To qualify for a buy-to-let mortgage, lenders use a particular affordability test, known as the Interest Cover Ratio.

Under this test, rental income from the property has to be the equivalent of between 125% and 145% of the monthly mortgage interest payment.

So, if your mortgage rate is 6.5% and you are borrowing £200,000, your rental income would need to be between £1,354 and £1,571 a month.

There are some ways around the test. For example, you can ask your lender for ‘top slicing’ under which they will include some of your income in their affordability calculations.

But not all lenders will do this, so if you want to use top slicing, it might be worth getting help from a mortgage broker.

As activity in the housing market slows, areas undergoing regeneration can be a good bet for property investors and home buyers.

Urban regeneration often triggers rising demand for housing as locations become more desirable places in which to live, which in turn attracts new businesses, according to Seven Capital.

“Developments such as new train stations, shopping centres, leisure facilities and mixed-use commercial spaces directly provide a better lifestyle, which in turn attracts new residents.

“This effect can then ripple outwards, attracting new businesses which support a higher-paid workforce and thus, increase demand for residential living nearby,” the group said.

Seven Capital has identified five locations that are seeing above-average regeneration, which will not only transform them into desirable places to live and work, but could also boost property values.

Derby

The Derby City Centre Masterplan is an ambitious regeneration scheme to deliver new retail, leisure and residential developments across the city.

Scheduled for competition in 2030, it aims to leverage £3.5 billion of investment to create 1,900 new homes and 4,000 jobs, as well as a hi-tech business park.

Meanwhile, the city’s Local Plan will see 11,000 new homes and more than 100,000sqm of office space built by 2028 in a bid to attract new employers to the city.

Derby is also poised to benefit from improved transport links through High Speed 2 (HS2), with the rail project putting it less than an hour away from London and within around 30 minutes of Birmingham.

These new amenities, employment opportunities and transport links are expected to lead to significant population growth in the city, leading to higher property demand, with Seven Capital predicting house prices could rise by 24% by 2025.

Birmingham

The UK’s second city has already benefited from a number of regeneration schemes in the past two decades, including the Bullring, New Street Station and Grand Central.

Birmingham is now focusing on the West Midlands Metro tram extension, which will create new transport links across the city.

Seven Capital expects the project to lead to a 6% increase in house prices in areas that will benefit from the increased connectivity.

Meanwhile the Paradise and Snowhill developments bring new office space and homes, while Digbeth is continuing to undergo regeneration, including the £1.5 billion Birmingham Smithfield development to create a mix of commercial space, offices, homes and public areas.

Birmingham is also set to be a significant beneficiary of HS2, which will cut the journey time to London to just 52 minutes.

Leeds

Leeds is already one of the fastest growing cities in the UK, and its appeal looks set to continue thanks to a number of regeneration projects.

Following on from the revamp of Leeds City Station, a £270 million development project is set to see the city’s Lisbon Square area transformed into a 2.8 hectare site that includes apartments, hotels and mixed-use office space.

Not only will it double the size of the city centre, but it is also expected to help boost the local economy.

At the same time, £8.6 million is set to be spent transforming road space into green space under the City Park scheme, while £7.4 billion will go towards expanding Temple Green Park and Ride, and £2.6 billion will be spent renovating older properties in the Holbeck area of the city.

Slough

Already a popular destination for London commuters, Slough is set to benefit from £3 billion of redevelopment cash.

The Heart of Slough project will see the former Thames Valley University land transformed into new homes, commercial space, retail and leisure facilities.

The town already boasts The Curve, a new theatre and library, as well as several new sports and leisure facilities, including an ice rink.

Meanwhile, plans are in place to transform the old Queensmere Shopping Centre into 1,600 new homes, as well as 12,000sqm of retail space and 40,000sqm of office space.

At the same time, the newly completed development The Metalworks offers homes less than 200 metres from a Crossrail station.

Bracknell

Bracknell has seen a number of regeneration projects during the past 10 years as the popularity of the town increases.

The £770 million Bracknell Town Centre Vision 2032 has already seen the creation of retail and leisure complex The Lexicon.

Future redevelopment projects include The Grand Exchange, a new residential complex designed to capitalise on growing demand for homes from people leaving London.

Other up-and-coming projects include Princess Square and The Deck which will provide new retails offerings and public space.

The spike in mortgage rates after the mini-budget in late September undoubtedly hit the housing market.

Demand has now fallen to pre-Christmas levels a lot earlier than usual, as would-be buyers sit on the sidelines, waiting to see what happens with mortgage rates and what the economic outlook holds for jobs and incomes.

In fact, it’s currently at half the level it was at this time last year, when market conditions were stronger, mortgage rates lower and there were fewer cost-of-living pressures on household budgets.

That drop in demand in turn has affected sales volumes, which are down 28% from a year ago and are now on a par with the pre-pandemic period.

More sellers dropping asking prices

Meanwhile, sellers are beginning to offer bigger discounts to buyers to get their sales agreed.

Data from our valuation and property risk business Hometrack, shows that the gap between the first asking price and the agreed selling price has started to widen in recent weeks.

But it’s important to remember that throughout the pandemic, sellers were enjoying the luxury of achieving their full asking price - and in many instances more - as demand surged among buyers.

The pendulum has now started to swing in the opposite direction and the average seller is now offering a 3% discount on their property to achieve a sale.

Why this isn’t a property market crash

Right now, we are simply transitioning from an unsustainably strong market to a more balanced one.

All the leading supply and demand indicators we measure continue to point to a rapid slowdown from very strong market conditions.

Despite higher mortgage rates reducing how much buyers can afford, new sales have been more resilient than some may have expected.

Committed buyers and sellers are continuing to bring homes to the market and agree on deals, although these are fewer in number and harder to negotiate and hold together over the buying cycle.

And while fall-through rates may be higher, they are not unmanageable for agents.

Our data shows that 1 in 15 homes formerly sold is returning to the market after the original sale has fallen through.

Importantly, we are not seeing any evidence of forced sales or the need for a large, double digit reset in UK house prices in 2023.

Historic data shows buyers’ offers need to be in the region of -5% to -7% below what the seller is asking for the property for annual price falls to take place.

We do expect the discount to widen further as we move to more of a buyers’ market, but the positive here is that strong house price growth has given sellers more room to negotiate on their asking price without losing their long-term value gains.

The prospects for 2023 really depend on how willing sellers are to adjust asking prices in line with what buyers are prepared to pay.

In good news for buyers, there’s now more choice available when it comes to finding a new home.

The average estate agent office now has 23 homes for sale, the highest level of stock seen since January 2021.

We’re still not quite back up to pre-pandemic levels yet, when the average agent had 29 homes on their books.

But the growth in homes available for sale is being seen across all areas of the UK.

Greater availability of homes for sale reduces upward pressure on prices

Rebuilding sales inventory, which boosts buyer choice, is part of the move to a more balanced housing market.

However, it’s important that sellers price their homes in line with what buyers are prepared to pay, given the current hit to buying power caused by higher mortgage rates.

More homes for sale will help to reduce the scale of the upward pressure on house prices and bring us back to a more normalised housing market for buyers.

House prices are not expected to tumble in 2023

Our expectation is that we won’t get an over-supply of homes for sale in 2023.

We expect some element of scarcity to remain a feature of the market, meaning house prices are not expected to fall dramatically next year.

The drivers and motivations to move home have shifted, and will continue to in our view.

Pandemic-related forces, including greater labour market flexibility, the rise in the number of people reaching retirement age and the desire for more space, means people will continue to look for new homes next year.

Some of these factors though, are now being compounded by rising living costs.

In particular, high levels of rental inflation are adding to the cost of living pressures for renters.

We expect this to support first-time buyer demand in 2023, even with the oncoming headwinds and the hit to buying power from higher mortgage rates.