High inflation likely to constrain house buying this year

With everyday living costs and interest rates continuing to rise, mortgage lenders expect a "softer" market for house purchases in 2023.

Incomes of prospective borrowers need to be sufficient to cover both their mortgage payments and normal household expenditure, and both have risen well above the rate of wage growth this year.

As a result, buyer demand is likely to be constrained until wages adjust, according to a market forecast from UK Finance, the trade association for the UK banking and financial services sector.

In November, mortgage approvals fell to the lowest level in more than two years as borrowing costs surged and a large number of mortgage products were withdrawn by lenders in the aftermath of the government's mini-budget.

New figures from the Bank of England show that following a decrease in approvals in October there was a further drop of more than 10,000 in November with lenders approving 46,100 mortgages. This was the lowest since June 2020, when restrictions in the early months of the pandemic meant that just 40,500 home loans were approved.

The number of homeowners opting to remortgage with a different lender fell to 32,500 from 51,300 in October.

Overall mortgage lending still rose in November to £4.4bn, from £3.6bn in October.

The actual interest rate paid on new mortgages increased by 0.26 percentage points in November to 3.35% and this is likely to go up further in the December figures.

House prices falling

For those buyers forced to wait, it may be some consolation that house prices are no longer escalating every month. In fact, the cost of the average UK home fell by 1.5% in December, according to the latest monthly report from Halifax.

It's the fourth consecutive monthly fall and means that the average house price across England, Scotland, Wales and Northern Ireland is now £281,272, down from £285,425 in November.

The rate of annual growth also declined to 2%, from 4.6% a month ago, with a slowdown seen in all nations and regions.

Kim Kinnaird, director of Halifax Mortgages, said that buyers and sellers are likely to "remain cautious" in 2023, leading to a reduction in both supply and demand. House prices are forecast to fall by around 8% over the course of the year.

However, the cost of the average home remains high -- greater than it was at the start of 2022 and over 11% more than house prices at the beginning of 2021.

"It's important to recognise that a drop of 8% would mean the cost of the average property returning to April 2021 prices, which still remains significantly above pre-pandemic levels," Kinnaird added.