Early buyers in 2023 are becoming more value-conscious, as they are facing higher mortgage rates, inflation, and the cost-of-living squeeze. This is causing them to hunt for smaller homes, such as 1- and 2-bed flats.

According to data, 27% of new buyers are looking for 1- and 2-bed flats, up from 22% a year ago. In London, this number is even higher, at 49%. The share of demand for 3-bed houses has fallen 5 percentage points to 39%.

While 3-bed homes are still the most in-demand property type among UK buyers, there is a growing trend towards apartments in areas near big cities. Some of the largest increases in share of demand for flats have been seen in towns next to London, such as Slough, Watford, Chelmsford, Guildford, and Dartford. The relative price differential is attractive for those who work locally or who commute to London and are able to work more flexibly.

In the short term, it is expected that further small single-digit price falls will occur in the first few months of the year. However, the housing market is in better shape to deal with the headwinds than in previous economic cycles.

Demand for homes is off to a slower start than more recent years, but it is likely to pick up further as the outlook becomes clearer after Easter. How much demand picks up depends on the economic outlook, the strength of the labour market, the level of inflation, and how this impacts interest rates.

Overall, the housing market in 2023 is expected to be more subdued than in previous years. However, there are still opportunities for buyers who are willing to be flexible and who are looking for smaller homes in areas near big cities.