KPMG’s Economic Outlook report for September 2023 provides a comprehensive insight into what lies ahead. Here’s a thorough analysis of the report, breaking down the key takeaways for anyone looking to make informed decisions in the UK property market.
A Slowdown Beckons
The report shows the UK economy exhibiting “renewed signs of stress” and predicts a slump in house prices by up to 10% in the latter half of 2023. While the shadows of a severe recession have dissipated, the economy isn’t out of the woods yet. High interest rates and low productivity are expected to curtail growth as the year progresses.
Yael Selfin, KPMG’s chief economist, paints a picture of a market beginning to feel the post-pandemic blues. With household excess savings nearly exhausted, and the housing market on a downtrend, the ripples of higher interest rates are beginning to impact investment intentions, transaction volumes, and corporate insolvencies. The full effect on households and the housing sector is yet to unravel fully.
Macro-economic Indicators
The report lays bare some critical indicators. Real GDP growth is seen decelerating to a mere 0.4% in 2023 and further to 0.3% in 2024. The upcoming General Election and ambiguous demand strength are perceived as potential risk amplifiers.
Inflation continues its high stride, with a return to the 2% target only expected by late 2024, primarily if businesses keep transferring higher costs to consumers to revive margins.
Moreover, the labour market appears to be losing its steam, with a noticeable slowdown in hiring and a diminished enthusiasm among workers for job switching. As the demand-supply gap narrows, a gradual fall in pay growth is anticipated.
Unveiling the Property Market Dynamics
Delving deeper into the housing market, it’s evident that the market is adjusting to the escalated interest rates. Mortgage approval plummeted by 22% in July 2023 compared to the previous year, with property transactions trailing by 16%.
The scenario depicts a two-fold challenge: higher mortgage rates acting as a deterrent for borrowers, and an increased risk of defaults posing a threat to lenders. The Bank of England estimates a significant blow to around 350,000 households, who will witness their monthly mortgage payments surge by over £500 by the end of 2023.
On the supply front, a sharp decline in residential housing completions was recorded at the year’s outset, aligning with the downturn in construction output and residential PMI data. KPMG’s forecast envisions a peak-to-trough dip in nominal house prices of about eight to 10%, roughly half the drop experienced during 2007-09.
What Lies Ahead for Property Investors?
The unfolding scenario presents a mixed bag for investors. While the anticipated fall in house prices may open doors for bargain purchases, the overall economic slowdown, coupled with the interest rates conundrum, suggests a cautious approach.
Moreover, the looming General Election adds a layer of uncertainty, which historically has had the potential to swing market sentiments significantly.
Investors would do well to keep a close eye on the evolving macroeconomic indicators and policy directions while considering long-term strategies to navigate through the forthcoming market dynamics.
The landscape of the UK property market is undeniably shifting. As potential investors, aligning investment strategies to the economic undercurrents, and perhaps waiting for a clearer picture post-election, could be a prudent approach to mitigate risks and optimize returns.