What Will Happen to the Southampton Property Market in 2023?

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 subdued, offering a greater feeling of stability in money markets.

So, on the back of that, what is the expectation for the British (and Southampton) housing market as we go into the new year?

The biggest issue is inflation. 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, it is believed by most economists 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). This pumped £450m 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 (as people had that money) 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 QE and the supply chain issues (all easy to say with hindsight!).

 

Too much inflation is bad for the economy and therefore, ultimately the property market.

 

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 of 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 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 Southampton 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 and 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 (17 out of 20 homeowners with a mortgage are on a fixed rate).

 

It’s these two factors of recession and interest rates that will place negative pressure on Southampton house prices.

 

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.

 

Southampton house prices have experienced 22.1% price growth since the pandemic started in March 2020.

 

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 Southampton property market is the number of people moving home (i.e., housing transactions).

 

You could ask yourself why Southampton people should be more concerned about the number of property transactions and not the change in Southampton 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 is 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.

 

3,725 households per year have moved home in Southampton since lockdown, compared to the long-term 27-year average of 3,132 per year.

 

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-2,500 annual figure of homeowners moving in the Credit Crunch years in the 2008/9/10 time frame.

Finally, let’s look at Southampton 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.

 

In the last 3 years, the average number of price reductions for the properties for sale in the Southampton area (SO14 to SO19) has been 160 reductions per month.

 

In October there were 310 price reductions and in November 296 reductions.

 

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

Yet, as most Southampton 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.

 

Yes, the price of Southampton property will be lower in 2023 by between 5% to 10%, yet these are only levels that were being achieved in the spring of 2022 – and nobody was complaining about those!

 

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 i.e., credit (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 Southampton property market.

These are my thoughts - what are yours?

55% more Southampton homes are on the market today than a year ago

 

More Southampton homes are now coming up for sale.

This is excellent news for Southampton homebuyers and Southampton landlords because as properties are no longer flying off the shelf as they did last year, the number of properties available to buy is beginning to return to long-term averages.

This means there is greater choice for Southampton buyers and this will reduce the pressure on Southampton house prices and return us to a more normal Southampton housing market for buyers (and sellers).

 

The average UK estate agency now has 25 homes for sale, the highest level of properties on the market since December 2021

(when it was 21 homes for sale). 

 

However, properties per estate agency brand is not the best judge of the property market.

Let’s look at the actual Southampton stats, which tell a slightly different story.

·         Southampton Detached Homes – Dec 2021, 122 available and today, 286 available – a rise of 134%

·         Southampton Semi-Detached Homes – Dec 2021, 124 available and today, 293 available – a rise of 136%

·         Southampton Terraced/Town Houses – Dec 2021, 67 available and today, 164 available – a rise of 145%

·         Southampton Apartments – Dec 2021, 554 available and today, 637 available – a rise of 15%

 

Overall, an increase of 55% - year on year.

(The data for Southampton is calculated by looking at all properties and plots for sale within a 4-mile radius of the centre of Southampton).

This growth in properties for sale has been seen across all areas of the British Isles. This is important because when there is a more significant availability of homes for sale, this diminishes the increasing pressure on house prices.

So how does a low number of properties for sale make such a huge difference?

Coming into the early spring of 2022, the levels of properties for sale were low (as seen from the low December 2021 stats above). It was ‘Hobson's choice’ for buyers, so they had to pay top dollar to secure their Southampton home.

 

The value of Southampton properties that had gone sale agreed in the early spring of 2022 (and completed their sale in September 2022) is 10.9% higher than those Southampton properties that had gone sale agreed in the spring of 2021.

 

The number of properties estate agents have to offer buyers is increasing; this will boost the choice for Southampton buyers, meaning we will move into a more balanced Southampton housing market. 

Nevertheless, it's vital that Southampton sellers place their properties, when they go onto the market, in line with what Southampton homebuyers are prepared to pay, given the current hit to their buying power initiated by higher interest rates.

 

Southampton house prices are not expected to crash in 2023,

however they will be lower than in 2022.

If you are buying and selling in the same property market, it doesn't matter what happens to property prices.

Also, some might say waiting for Southampton house prices to drop will enable them to grab a bargain.

Well, sorry to 'rain on your parade’, but you should read my recent article that discusses what would happen if Southampton first-time buyers waited for Southampton house prices to drop. If they waited, because interest rates are rising, the extra mortgage payments would cost them a lot more than the savings made on the purchase price. (Send me a message if you want a copy of it).

What has an effect on the value of your Southampton home is the number of properties for sale at any one time compared to the number of buyers. When there is an over-supply of homes for sale, prices go down, and with reduced demand, house prices will go down. So how do the stock levels of properties for sale compare to the past?

If you recall at the start of the article, I stated the average UK estate agency had 25 properties on their books now. In 2018/9, that average was 36 properties for sale (and for added comparison, the long-term average, since records began in 2016, is 49 homes for sale).

As you can see, whilst stock levels have grown, we are a long way off the long-term average.

A great way to determine what will happen to the property market is by measuring that stock level (i.e. the number of properties for sale). Check once a month and see how many properties are for sale. Let me break that down for Southampton specifically and how you can judge the market from your sofa.

 

There are 1,441 properties and plots for sale in Southampton now. To give context, the long-term 16-year average is 1,897 properties and plots for sale, yet in the credit crunch of 2008, it reached 4,462 properties and plots for sale at one point.

I envisage some component of scarcity to persist in the Southampton property market, meaning whilst the house prices that were being achieved in the spring of 2022 won't be replicated in 2023, it also won't fall dramatically next year. 

The incentives and impetuses to move home have changed in the last six months and will continue to do so into 2023. 

As I have written before, there are a larger number of mature homeowners in their 60s and 70s downsizing to help with heating bills, whilst the desire for more space means younger families will continue to look for new homes to live in, in 2023. 

If younger 20-somethings can access the Bank of Mum and Dad for mortgage deposits, they will also carry on buying. This is especially true because double-digit rental inflation makes renting quite expensive compared to buying (even with the increased interest rates).

These are my thoughts on the Southampton property market this week. Do put in the comments (or send me a message) your thoughts on the matter discussed and any other property-related topic you want some advice and opinion on.

 

Thank you in advance ...

Inflation - Every Southampton Landlords’ Saviour

Some of you reading this will be old enough to remember the 1970s – the bell-bottom trousers, the huge collars, frayed jeans, disco glitter balls, maxi dresses, midi skirts but above everything else - HYPER-INFLATION.

With inflation currently standing at 11.1%, many of us envy the last few years when we have been lucky to experience sub 2% inflation.

But in the 1970s, the UK had proper and persistent double-digit inflation for seven of the ten years of that decade.

The average annual UK inflation rate for the 1970s was 12.3% per year, with prices rising by 25% in 1975 alone.

The inflation was caused by several things, including oil prices quadrupling in the 1973 Oil Crisis (sounds familiar, doesn't it?), powerful unions, a high level of growth and investment in the 1950s and 60s, meaning it was easier for the British economy to experience inflationary pressures in the 1970s and the property market then was not immune to these inflationary pressures.

The average Southampton house rose from £5,238 to £27,131 between the start of 1970 and the end of 1979.

That would be the equivalent of an average Southampton house going from today’s price of £326,788 to £1,692,483 in 2032.

The existing climate of rising prices (inflation) is affecting everyone, from filling up the car with petrol to doing the weekly ‘big shop’. Looking specifically at the buy-to-let market, Southampton landlords are suffering from rising costs and prices like everyone else, including a substantial increase in labour price inflation as skill shortages have pushed up the cost of using all the trades.

Other worries include whether tenants can pay their rent with the cost-of-living crisis. Also, there is a rise in interest rates which increases landlords' mortgage payments and professional fees, including accountants, and landlord insurance rates continue to climb.

 

So, is inflation all bad for Southampton landlords?

 

Most economists say that inflation is bad for the economy.

The absence of steady and stable prices makes consumers and businesses hold off making decisions to buy things, and when that happens, the economy stalls. Look at what happened in Germany in 1923, where you needed a carrier bag of cash to purchase a loaf of bread. Today, Zimbabwe has annual inflation of 269% a year, and Venezuela has 156% annual inflation, meaning their economies are on their uppers.

Thankfully, nobody is predicting British inflation will reach those levels.

 

Yet would it surprise you that inflation can be good news for landlords?

Property has grown above the rate of inflation over the last 50 years. It means that your hard-earned savings invested in property will increase in value over and above the inflation rate, which will safeguard your wealth during these periods of high inflation.

However, knowing where we are on the economic cycle makes it easy to spot when house prices are lower in the short term (in real terms), thus buying yourself long-term 'extra' profit.

 

The average Southampton property today is worth £326,788. Roll the clock back to the autumn of 2007, and it was £220,300.

 

Quite a gain (and no profit) until you look at inflation.

It appears people who bought in 2007 have made money when they have lost it in 'real terms.

What do I mean by that? What exactly does ‘real terms’ mean?

Everyone knows that £100 today doesn't buy what £100 could have bought you ten years ago and much less than 20 years ago … that's the effect of inflation.

‘Real terms' means the price value after adjusting for inflation and expressed in constant Pound Sterling, reflecting buying power relative to another year. For example, the ‘actual’ price of a Mars bar in 2000 was 26p, yet its ‘real price’ (expressed in today's prices) is 74p. Why 74p? Because 74p is what a Mars Bar costs today.

What price in the past has the same spending power today? So, looking at the £220,300 average price for a Southampton house in autumn 2007 (as mentioned above), one would need £366,975 today to buy the same amount of ‘retail goods and services’ (e.g., cars, food, Mars Bars, holidays etc.) - that is what 'real terms' mean.

That means even without any house price falls (which many are predicting),

average house prices in Southampton are £40,187 cheaper in ‘real terms’ today than in 2007.

 

Calculation: £366,975 (autumn 2007 Southampton house price expressed in today's spending power terms – i.e., in 'real terms') less £326,788 (today's average actual house price in Southampton) equals £40,187.

 

The other significant advantage of inflation for landlords is buy-to-let mortgages. Most landlords use a buy-to-let mortgage to buy their Southampton property investment. Let me give you some scenarios which explain why this is the case.

Firstly, let's assume there was no inflation (like in Japan in the last couple of decades). If a landlord took out an interest-only buy-to-let loan of £200,000 10 years ago, then in 10 years, that buy-to-let mortgage, which would need to be paid off, would still have a ‘real value’ of £200,000.

Secondly, let’s assume the same landlord took out an interest-only buy-to-let loan of £200,000 10 years ago (2012). In the last decade, there has been 31.4% inflation, so that buy-to-let mortgage would have a ‘real value’ of only £137,200.

Now inflation won’t be in double digits for the long term in the UK (higher interest rates and a recession will put pay to that), yet let's say the inflation rate for the next ten years was 4% per annum.

 

In this scenario, the ‘real value’ of the £200,000 buy-to-let mortgage falls to less than half its original real value of £91,278.

 

So, if one thinks about it, inflation could be just the thing that Southampton landlords need to shrink the ‘real value’ of their buy-to-let mortgage. As the saying goes, every cloud has a silver lining.

On the back of double-digit percentages, growth rises in rents, and everything stated in this article, inflation could be the silver lining!