Is 2023 the year that first-time buyers have been waiting for?

The first decline in UK home prices in 15 months has officially occurred. The cost of property decreased in October from an average of £272,259 in September to £268,282, according to Nationwide’s latest House Price Index, the first decline since July 2021 and the largest since June 2020. Is 2023 the year first-time buyers have been waiting for, with mortgage rates rising, affordability tests becoming more stringent, and analysts admitting that property prices are set to fall even more next year? The data requires much closer examination if you want to comprehend why property values have been declining for months.

Interpreting house prices has always been particularly challenging. We frequently have a tendency to believe information that confirms our preferences or preexisting opinions. Therefore, folks who have just made a purchase will seize on information that reassures them that they haven’t simply made an expensive mistake. Those trying to climb the ladder will be eagerly awaiting news of reducing pricing. Experts like estate agents in Winchester say the time is prime for first-time buyers in the market with the property market data available.

Compare Rightmove and the UK HPI, two of the top indices, to show the difficulty. Both claim that prices in London have increased, the former by 8.3% and the latter by 6.9%. However, actual prices are declining. What is happening?

The reason the indices vary is the first thing to comprehend. Rightmove examines prices that have been advertised as one factor. However, asking prices may be higher than clearing prices at periods when the market may be sliding, which inflates the figures. On the other side, HPI, a publication of the UK government, examines the real cost incurred. However, the index must wait until sales details are submitted to the Land Registry, which takes place well over a month following the conveyancing procedure, in order to obtain that data.

Add to these several computation techniques. In contrast to the UK HPI, which uses a geometric mean, Rightmove uses an arithmetic mean (and a different weighting methodology). As a result, Rightmove estimates that the average London house is roughly £150,000 more expensive than the government estimate, which is likely due to their motivation to somewhat “pump up” the market.

However, the main issue is that even the most trustworthy index only considers changes in nominal terms. Because of the high CPIH (the measure of inflation that includes housing costs), it is currently necessary for home prices to rise by at least 8.8% annually in order for the real value of a real estate to remain constant.

By practically every metric, London property prices are already down after accounting for inflation. Unfortunately, the majority of commentators believe that things will worsen in 2023. Capital Economics anticipates a 12% decline, Lloyds a 9% decline, and Credit Suisse a 15% decline. Only time will tell. But regrettably, those are all nominal declines. As a result, if CPIH stays at its current level (and some believe it may climb dramatically in 2023 due to the removal of the government’s restriction on domestic energy unit prices after April), house values may decline by as much as 30% in real terms.

There are valid reasons to be less optimistic, especially if you haven’t yet made the purchase, despite the market’s eagerness to reassure prospective purchasers that a big crash is improbable. High mortgage payments may result property defaults or distressed sales, and even tiny amounts of frantic selling can cause prices to fall dramatically in a market. Just for that reason, 2023 might be a great year to become knowledgeable about real estate auctions. A nice SDLT exemption for first-time purchasers up to £425k also remains after the mini-budget U-turn.

But first-time homebuyers should take note that while consumer price inflation is above 10%, the deposit you diligently prepared for the down payment on your ideal starting house is currently earning less than 2% in a savings account. Therefore, while home prices may decrease, your relative purchasing power will also decrease. Oh, and since interest rates have not yet reached their anticipated peak, it is possible that they will increase before they decline once more.