Following decades of low interest rates and steadily rising property prices, some feel that rising inflation, the recent significant hike in UK interest rates and ongoing nervousness in the financial markets could mean we are set to see a downturn in the UK property market in 2023.

Mortgage rates could drive property market shift

While interest rates were already creeping up amid rising inflation – due to a combination of factors, including supply chain issues resulting from the conflict in Ukraine – the UK government’s ‘mini-Budget’, announced in September 2022, sent the financial markets into a spin.

The resulting signal from the Bank of England that it would raise interest rates significantly further has had a major impact on the mortgage market in the near-term. But, as Gary Edwards, Managing Director, Head of Credit Advisory, Private Banking, HSBC UK, suggests, we may not know exactly how that will impact the 2023 property market until the dust settles. 

“The UK base rate hasn’t jumped this quickly, by this amount, since 1988 – some 34 years ago,” he says. “That could potentially have an impact on the market in general. Knight Frank estimates the UK property market will drop off by around 5% in 2023, followed by a further 5% the year after. The main driver for that drop will likely be first-time buyers. Property prices are already relatively high and a lot of first-time buyers take out mortgages that stretch them financially. These increased rates could take first-time mortgages out of reach for many of those, with the base rate rising and monthly repayments becoming too expensive.”

Other factors may also contribute to a dip in the overall market. The government’s Mortgage Guarantee Scheme, devised to help first-time buyers obtain 95 per cent mortgages, is due to expire at the end of 2022, for example – although there have been suggestions that this may now be extended.

Pressure could mount on buy-to-let investments

Charlie Hoffman, Managing Director, HSBC Private Banking, agrees the overall property market could see a slight drop in 2023, and adds that the current climate of rising rates could also impact buy-to-let activity.

“There is a population of people who have buy-to-let mortgages and have their tenants on fixed tenancy agreements,” he says. “But buy-to-let mortgages in the UK are often interest-only – so if the interest on those increases significantly, their mortgage payments are potentially going to rise faster than they can rebalance their rental income.

“As a result, there could be a potential fall-out for those who have bought buy-to-lets without a means to service the debt outside of their rental income.”

The prime central London anomaly

While the buy-to-let market may see an impact from the current rate rise, investors and wealth holders with property interests in prime central London are unlikely to be impacted in the same way, Hoffman continues. That’s because such investors tend to have the wealth to service any debt tied to their investments or are ‘cash investors’ with no debt tied to their property.

If anything, he suggests we could see a bifurcation of the UK property market in 2023, with investment in tier-one London property surging compared with the rest of the market. 

“The London market could turn into a feeding frenzy for buyers, especially those buying with US dollars and other currencies,” he explains. “In real-terms, the cost of buying property has dropped by some 30 per cent for buyers using US dollars – due to the fall of the pound against the dollar – and some investors may well see London as an alternative to investments such as gold.”

Appetite for London property is also likely to be maintained as a result of the London market’s strong and consistent performance over the past 30 years or so, according to Edwards. In that time, property prices in London have never significantly dropped – which he adds will increase confidence to the market there.

Regional differences

Outside of prime central London, Edwards believes some investors – again, those trading in US dollars and other international currencies in particular – may find strong pockets of opportunity in other London areas, such as those that have seen largescale development in recent years.

“In areas such as London’s Docklands, where large numbers of apartment blocks and riverside developments are being built, there may be good deals to be had as investor levels potentially begin to drop,” he says.

Further afield, Hoffman says there may also be a ‘drop off’ of activity in more rural areas. “We have seen quite a lot of growth in the value of country properties in the past few years, as people have moved out to the countryside amid changing working patterns induced by the pandemic,” he explains. “As a result, it’s possible we may see a slight drop off in country properties, as well as some of the other secondary areas of London.”

Revisiting your strategy

While Hoffman and Edwards do not see a significant drop in property investment in 2023 as a result of the current conditions, they do believe savvy investors will be those who seek guidance on and revisit their strategies.

“Following a lengthy and sustained period of low interest rates and a long period of relatively consistent returns, investors may benefit from revisiting and adapting their investment strategies,” Edwards explains.

“Our message would be to call your relationship manager or credit advisor, because there are plenty of options available – from fixing rates on credit, to hedging strategies, currency options and changing dividend frequencies. In more volatile times, it may pay to revisit your strategy and adapt accordingly.”