Happy new year! Interest rates, property prices, inflation and more; What does 2023 have in store for the Property Finance market?

Inflation and the Bank of England Base Rate - How are they linked?

Throughout 2022 the Bank of England Base Rate continued to rise and saw an overall yearly increase of 1300% from 0.25% to 3.5%. At its meeting ending on 14 December 2022, the Monetary Policy Committee (MPC) voted by a majority of 6-3 to increase the bank of England base rate for the ninth time in a row, resulting in the highest base rate seen for 14 years.

The MPC sets monetary policy to try and achieve the UK’s 2% annual inflation target, in a way that helps to sustain overall economy growth and levels of employment.

Inflation, the rate at which prices rise, has been increasing at its fastest rate for 40 years as the cost of food and energy soars. The inflation rate recorded for the UK in October 2022 was reported to be 10.7%, some five times higher than the 2% target.

In an attempt to reduce the rate of inflation, the MPC increase the Bank of England base rate, which results in first and second tier banks having to increase their interest rates. They have a requirement to take this action due to their reliance on raising capital via the ‘wholesale’ market, to ensure their capital reserves adequately comply with regulatory policies.

The first and second tier banks raising their rates has a two-fold effect for general consumers and businesses – borrowing money becomes more expensive, and saving money produces a higher return. In theory, this should encourage people to borrow less and save more, therefore helping to reduce generalised purchasing demand, meaning manufacturers have less incentive to increase prices.

The whole of the lending market isn’t affected by the Bank of England Base Rate rises however. ‘Self-funded’ specialist lenders such as Onyx Money, have no external market drivers affecting cost of capital, allowing us to operate with complete autonomy over the interest rates we set for lending products. To read about this in more detail, see Interest rates and their effect on Property Development Funding.

Property prices - What will happen in 2023 and 2024?

Following the most recent bank of England base rate rise, a typical tracker mortgage is now costing £49 more a month while standard variable rate mortgages face a £31 jump (BBC: Dec2022).

With the MPCs next meeting set for 02/02/2023, further increases in the Bank of England base rate are anticipated for 2023.

As mentioned above, this means consumers and businesses are encouraged to save as opposed to purchase, resulting in a decrease in purchasing demand in the housing market. This drop in demand will result in a plateau or decrease in house prices in 2023.

According to the below chart from Savills, house prices are forecast to fall by 10% in 2023, with a recovery in purchaser demand and consequently capital values anticipated in 2024 (Guardian: Dec2022).

Year-on-year growth, %

House Prices Chart 2023 — Guardian graphic. Source: Savills, using data from Nationwide. Note: 2022 shows Nov 2021 to Nov 2022 to give a 12-month figure

So, will this result in the UK entering recession in 2023? A recession is defined as when a country's economy shrinks for two three-month periods (quarters), in a row.

The UK is estimated to have entered a recession in the third quarter of 2022, which could last until the end of 2023. Higher inflation and interest rates have significantly reduced households’ purchasing power. (KPMG: Dec2022)

With the average house price dropping 2.3% in November it is predicted this trend will continue throughout 2023, until inflationary pressures are reduced.

Investor interest – buy or sell?

While a recession can be disappointing news for the average consumer, some investors and businesses see it as an opportunity to take advantage of the housing market while prices are at their lowest.

Despite a higher cost of borrowing, property professionals will believe that house price increases will inevitably be on the horizon, therefore making the short-term pain of high borrowing costs acceptable due to the potential gain of long-term capital appreciation.

A recession and reduction in house prices suits a ‘cash buyer’ – an investor who has no need to rely on traditional bank funding or alternative lenders to borrow money to facilitate property purchases, as they already possess strong liquid reserves. While cash buyers only make up a small proportion of the UK property market, It is anticipated that this segment of the market will invest heavily into property stock during 2023.

Lending products such as bridging finance will inevitably see an increase in popularity, as investors look to move quickly and cash in on lower property prices: See Bridging loan market remains strong in 2022.

Property Market in 2023 overview

The macro-economic trends discussed above outline a simple conclusion – the property market will undergo a significant period of change in 2023:

Increased borrowing costs, leading to..
Less consumer/business appetite for borrowing and higher rates of existing mortgage default, resulting in..
Decreased purchasing demand (for the average consumer), therefore..
Lower capital values

An increase in the annual cost to rent the average UK property is also expected in 2023, as Landlords have to raise rents to combat higher borrowing costs.

The points raised above make it clear however that 2023 presents a rare opportunity for property investors, landlords and developers to increase their stock for a lower cost than observed in the previous 5 years.

Specialist lenders like Onyx Money are expecting to see increased volumes of investor enquiries throughout 2023, so if you’re a property investor and you’re looking for a new funding partner to support your ambitions, please feel free to reach out to us.

Onyx Property Finance are experts in providing financial solutions for property developers. We are dedicated to keeping on top of market trends and ensuring our customers are kept informed of any changes that might affect their borrowing, projects and investments – see our blog for all the latest insights.

Speak to an expert today and get up to 100% of your purchase and build costs with fixed interest rates for the lifetime of your loan: info@onyxmoney.co.uk.