House prices, interest rates and tax: here’s what to expect in 2023

From house prices to tax changes, Rachel Lacey explores what the next year could have in store for our personal finances.

2022 has been a difficult year to say the least, marked by political chaos, stock market volatility, soaring interest rates and inflation reaching levels not seen since the early 1980s.

Three prime ministers and four chancellors later, you won’t be alone if you are wondering – quite possibly dreading – what 2023 has in store.

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We don’t, of course, have any access to crystal balls, but here’s our take on the big personal events you’ll want to be watching over the next 12 months.

House prices

We’ve long been used to house prices travelling in one direction only: up, but that is starting to change and will more than likely continue into 2023.

Although house prices overall were up by 4.7% in the 12 months to November 2022 (reaching an average of £285,579), the Halifax House Price Index reported a drop of -0.4% in October and further fall of -2.3% in November.

Home buyers in the UK are facing unprecedented affordability challenges: mortgage rates are rising, the cost-of-living crisis is making it harder to save and wage growth isn’t keeping up with inflation. It’s little wonder then that there’s now a widespread view that prices will fall in 2023.

• UK housing most unaffordable since Victorian times

The question, of course, is by how much.

Estate agency Savills is predicting ‘double-digit’ falls in 2023, while Zoopla along with Knight Frank are forecasting a 5% drop. The Office of Budget Responsibility (OBR), meanwhile, is forecasting a 9% fall by autumn 2024.

There will invariably be a large amount of regional variation, with some parts of the country seeing greater falls than others.

Falls should theoretically give something of a break to struggling first-time buyers, just how much will depend on the outlook for interest rates and the subsequent impact on borrowing costs.

Interest rates

In the year to December 2022, interest rates rose from 0.1% to 3.5% as the Bank of England was forced to respond to rising inflation.

And, as things currently stand, rates are likely to remain on an upward trajectory.

After Kwasi Kwarteng’s disastrous mini-budget in September, there was speculation that interest rates could rise as high as 6% in 2023. Remedial actions implemented since Kwarteng and Liz Truss left office means experts have revised their expectations downwards, nonetheless interest rates will still likely rise.

• Here’s how UK interest rates compare with others around the world
• UK interest rates rise to 3.5%

At the time of writing, Schroders said it expected interest rates to peak at 4%. The ratings agency Fitch is more hawkish, forecasting a rate of 4.75% by quarter two of 2023.

How these changes impact you will depend on where you are in life. It will significantly increase the cost of new and variable rate mortgages.

For first-time buyers that will somewhat undo the benefits of falling house prices, while existing borrowers will see their monthly repayments go up if they’re moving, re-mortgaging or not on a fixed-rate deal.

Those who have paid off their mortgages will enjoy the flip side of rising interest rates – better savings deals. Now’s the time to check your provider is passing on increases and shop around if not.

If you’ve got money in Premium Bonds, the increases also mean you’ve got a greater chance of winning. In January, NS&I will be increasing its prize pot by £80 million. This will see the prize fund rate rise from 2.2% to 3%. These are just average returns though and Premium Bonds wins are not guaranteed.

The chance of any £1 bond winning in any given month is 1 in 24,000, according to NS&I.

Inflation

2022 was an expensive year, with the cost of getting around, keeping ourselves warm and fed rocketing.

The year started with an inflation rate of 5.4% - well above the government’s 2% target – but it was only to get worse. By October, it reached 11.1% - a 41-year high.

It’s now widely believed that inflation has peaked. By November, the consumer prices index had dropped back slightly to 10.7%, but it’s still worryingly high.

• Cash is not king: what falling inflation will mean for investors in 2023

The Bank of England has said it expects inflation to remain around the 10% mark in the short term, but thankfully it is forecasting it to fall sharply in the middle of 2023. Within two years, it expects inflation to fall back below its 2% target.

But what about earnings growth? Companies are under immense pressure to increase wages to help staff deal with the rising costs of living and, according to WTW, we’ll see salaries rise by an average 5% in 2023.

The Energy Price Guarantee

In October 2022, then prime minister Liz Truss introduced a new Energy Price Guarantee to protect consumers from rising energy prices. This sets the maximum amount suppliers can charge per unit of gas and electricity and it works out at around £2,500 a year.

According to the government, this will save the average household £900 over the course of the winter (October to March).

The guarantee was initially pledged to last for two years, but that was quickly reined in by new chancellor Jeremy Hunt. Now the £2,500 cap will only last until March 2023.

From that point, it will be scaled back and a new higher cap of £3,000 will apply for a further year. This will see household savings drop to £500.

Tax hikes

Following Jeremy Hunt’s Autumn Statement, from April 2023 more people will start paying more tax.

This won’t be by increasing taxes, it will chiefly be the result of freezing or lowering the thresholds at which certain taxes start to be charged.

This includes:

• Reduction of the threshold for additional rate of income tax from £150,000 to £125,140
• Reduction of the capital gains tax allowance from £12,300 to £6,000 (and down to £3,000 in April 2024)
• Reduction of the dividends tax allowance from £2,000 to £1,000 (which will fall again to £500 in April 2024)
• The thresholds for the personal allowance, basic and higher rate of income tax will remain at their current levels
• The Inheritance Tax (IHT) threshold will remain at £325,000

The changes make it even more important to invest as much as you can in wrappers that protect your money from tax, like ISAs and pensions.

• Use this neat ISA trick to avoid a big tax bill in 2023
• Autumn Statement 2022: who are the real winners and losers?
• Warning: possible inheritance tax and pensions raid in 2023

And, while the tax tail should never wag the investment dog, if you’ve got any capital gains in the pipeline, it is at least worth bearing in mind that that CGT allowance will be halving in April.

State pension age review

Last, but not least, is the state pension age review, the results of which are expected by May 2023.

While the triple lock has been protected and current retirees are enjoying a bumper 10.1% increase to the state pension this year, youngers workers may have to remain in work longer before they can claim it.

• State pension age could rise earlier than planned
• State pension age: why changes could leave a hole in your pension

Currently, the state pension age is 66, but that’s already scheduled to gradually increase to 67 for people born after 5 April 1960 and again to 68 for those born after 5 April 1977.

The review that is currently taking place will consider whether that second increase to the state pension age should be bought forward to 2037-2039.