The autumn of 2022 saw economic and political instability with the resignation of Boris Johnson as Prime Minister and the ill-fated Liz Truss 44-day premiership. Now as we go into 2023, the economic and political turmoil has somewhat subdued, offering a greater feeling of stability in money markets.

So on the back of that, what is the expectation for the UK and, in particular, the Derby housing market as we go into the new year?

Low, steady inflation of around 2% a year is good for the economy, yet the high levels we are experiencing now isn’t. It affects the spending power of the pound in your pocket, and it alters the way people spend their money - including buying and selling property.

So where has this inflation come from?

Many blame it on inflated gas prices because of the Ukraine issue. However, most economists believe that only around 4% of the current 10.7% inflation figure is because of the fuel crisis.

UK inflation was already running at 6.2% when the Russian tanks rolled into Ukraine in February 2022 which created that energy price shock. Therefore, where has the rest of the inflation come from?

The catalyst of inflation started in 2020 with the Bank of England’s Quantitative Easing (QE). Quantitative easing is a euphemism for printing money through a central bank's open market operations. The purchase of government bonds is used to increase the money supply.

This pumped £450m of 'new money' into the economy at a time when the future looked bleak. The problem was, people had nothing to spend that money on, so when things started to get going after the lockdowns, there was a mis-match of too much demand for goods and a lack of goods and services, because there wasn’t enough supply of those goods and services with the supply chain issues.

This all meant prices went up (i.e., inflation). The catalyst of this inflation was the Bank of England 'printed too much money' in 2020 with Quantitative Easing and the supply chain issues. This is all very easy to say with hindsight!

Two things will reduce inflation. One is a recession and the other is increased interest rates.

Many find it fascinating that the Bank of England were talking the UK economy into a shallow recession in the autumn. Yet there was method in their madness. It was because they didn’t want to rely solely on the second method; increasing interest rates.

Better for the economy to have a shallow mild recession and interest rates rising to say 4.5% by the middle of 2023 to reduce inflation, than placing the whole job of reducing inflation on interest rates.

If that had been the case, interest rates would need to rise to, say, 7% or more, causing the economy, and the property market, to stall… and thus create a subsequent deep and long recession.

Therefore, with the Bank of England having recently increased its base rate to 3.5%, with more interest rate rises to come in 2023, what does this and the mild recession mean for the Derby property market?

A recession will increase unemployment levels, which have been comparatively low in the last few years. Depending on the type of roles/jobs that are made redundant, will determine the effect on the property market. Until that happens, we won’t know.

Everyone is suffering from higher gas, electric, shopping bills, yet with interest rates rising, this will increase the pressure on household budgets. Higher interest rates mean higher mortgage payments if the homeowner/landlord is on a variable rate mortgage. Fortunately, 17 out of 20 homeowners with a mortgage are on a fixed rate.

 

Yet let us not forget this pressure is coming off the back of two of the strongest years on record in terms of house prices and transaction levels.

This is interesting when compared to the UK average, where average house prices have risen by 27.4% or £44,700 since March 2020.

Before I tackle the issue of house prices in 2023, I would like to look at the number of transactions.

To many, the number of properties selling is irrelevant, yet I believe it is as important, if not more important, than house prices. I believe the best way to judge the health of the Derby property market is the number of people moving home i.e. the number of property transactions.

You could ask yourself why Derby people should be more concerned about the number of property transactions and not the change in Derby property values. Many economists believe the number of property transactions is a better judge of the health and virality of a housing market. The higher the number of people moving home the better for the whole economy than a smaller number of property transactions, whilst the same can’t be said for higher house prices.

Transactions levels have been quite high in the last couple of years.

 

Looking at the stats coming through in the last couple of months, maybe we will settle for a figure somewhere between the two figures above, yet nowhere near the sub-2,000 annual figure of homeowners moving in the Credit Crunch years in the 2008/9/10 time frame.

Finally, let’s look at Derby house prices in 2023.

A good place to start to judge house prices is how many reductions are taking place on the properties that are already on the market.

Homeowners are being more realistic with their pricing and the price that one will achieve for their Derby home today and the rest of 2023 will be lower than one would have achieved in the spring of 2022.

Yet, as most Derby people buy another property when they sell, and most of the time move up market, the price you would have had to pay on the next purchase would have been even more.

Final thoughts.

Several economic commentators are preaching doom and gloom for the property market in 2023, yet things are very different than the Credit Crunch years of 2008/9.

The property market crashed in 2008/9 mainly because the banks and building societies stopped lending money - that is why it was called the Credit Crunch!

There are two large differences this time round.

The first is the introduction of Mortgage Market Review mortgage stress testing instigated in 2014.

Homebuyers taking out a mortgage must have undergone a stress test on interest rates to obtain a mortgage since 2014. These stress tests are a safeguard to ensure that if their household income continued to be the same, the homeowner could afford higher mortgage rates.

The second is the banks and building societies have much higher cash reserves. Higher reserves will ensure they can continue to lend money and so more mortgages are available, although at a slightly higher interest rate than a year ago.

With mortgage rates falling back, with some very attractive fixed-rate deals knocking on the door of 5%, this is a development that may continue into 2023 as banks and building societies obtain cheaper funding sources and then compete for business by driving down the price of mortgages – which would only be good news for the Derby property market.

These are my thoughts – what are yours?