The last three months of 2023 have been far more trying for the United Kingdom than its best economists could have predicted. The climbing costs of living are weighing heavily on the economy, shutting down its ability to create more opportunities for the people. The British economy shrank by 0.3% in the third quarter of 2023, a trend that is continuing to this day. February recorded a drop of a full 0.2 percentage points lower than was forecasted, leading Marc Ostwald, chief economist at ADM Services International to comment that the U.K. economy is “likely to continue to flirt with recession for most of this year”. Despite the projections of doom and gloom, however, experts appear to be optimistic about the prospects of the housing market, given that the average prices for residential property had fallen by 3.2% in 2023 compared to 2022.
The end of 2023 saw the real estate sector struggling along with everyone else as high interest rates resulted in increasing disinterest in real estate investment. The real estate industry is currently responsible for about 13% of the UK’s economic output. As its relationship with interest rates suggests, it is also highly sensitive to borrowing costs. Latest data from Halifax suggest that Britain is set to record the strongest annual growth rate in housing this year, as house prices rose by 2.5% in just the first month. The price increase amounted to 1.3% on month-on-month terms, the largest increase since June of 2022. According to the experts, the housing market can expect to see a little more growth than in previous years given the decreases in mortgage rates, a resilient labour market, and declining inflation rates. There are still calls for caution, however, as there is little reason to believe that slowing inflation rates will feed directly into drops in housing prices, especially given the current economic environment.
As of now, the British economy is in what is known as a technical recession, where the quarterly numbers indicate a shrinking economy. This is the first time that the British economy has fallen into a recession since the very beginning of the pandemic, in the first half of 2020. Next month’s budget statement is expected to cut taxes for work and business in an ongoing effort to encourage the economy to expand. Critics of the government believe that continued interest hikes are the reason that the country’s economy is stagnating. England’s interest rates have been increased 14 times since 2021, consecutively. These fiscal policies however have been successful so far in maintaining low inflationary pressures in the country: inflation is currently at 4% after rising to 11%. As higher interest rates make borrowing more expensive, lessening the overall consumption in the country. The government does not appear to be too interested in slashing interest rates too soon either, given the immediate increase in expenditure that would result.
However, it is believed that the day that the Bank of England (BoE) finally begins to slash interest rates is not far off. The current trend is also heading that way, as the Bank has been lifting rates from a historical low of 0.1pc to 5.25 between December 2021 and August 2023. Three main factors will determine the future of the housing market moving forward. Mortgage costs are of course the main one, which is related to the BoE’s rates. Interest rate amendments are forecast to start in June of this year. Other factors include macroeconomic factors such as changes in real incomes and broader economic recovery. Political changes can’t be left out of the conversation either, as England approaches a national election this year. The trend in the housing market for the year will reflect a clear rebound from the years that precede it, with even a possible boom in the market if stimulating fiscal policies are added into the mix.
Housing prices—especially in urban areas—can be expected to grow regardless of these uncertainties. As long as the population keeps growing, of course, the need for housing springs eternal. According to the Office for National Statistics (ONS), the UK’s population is set to grow to about 73.7 million in 2036. New houses need to be built at a rate of about 180,000 per year for the decade to come to account for this growth. This rate of construction will require large-scale policy support to manage the regulations and other bureaucracies that make housing supply growth in the country inconsistent. Most Tory voters in the country however would rather that their environmental concerns be considered before any actual construction takes place. The Prime Minister and the Secretary of State for Levelling Up and Housing and Communities are currently attempting to balance a difficult juggling act between these two interests. The current policy approach is to boost housing development projects on uncontested land such as former industrial estates and car parks. Twenty major towns and cities have so far been allocated for this strategy, including Bradford, Liverpool, London, and Newcastle-upon-Tyne. Removing the many bureaucratic obstacles that stand in the way of people extending their housing spaces through conversions and extension projects is another avenue that is currently gaining increasing traction. These policies are expected to generate at least 11,500 more housing units being built in London alone. While the news of more housing is most welcome of course, associations such as The Builder’s Federation do not believe that it will be adequate to address the nation’s full housing requirements.
(Theruni M. Liyanage)