The latest, October 2023, UK House Price Index by Hometrack estimates that UK house prices will fall by 2% next year. The firm says: ‘The jump in mortgage rates over the last 18 months has been the primary driver of the current overvaluation in home values. House prices need to fall further, and incomes increase, or mortgage rates need to fall further to reset affordability and support demand or sales. In our projections, we assume mortgage rates will fall to 4.5% by the end of 2024 and remain at that level into 2025.
‘The number of homes for sale is at a 5-year high, meaning sellers will need to price competitively if they are serious about selling. This is likely to keep pricing under pressure. Faster growth in household incomes in 2024 will support affordability but leave housing slightly overvalued at the end of 2024. Households taking longer mortgage terms would remove this overvaluation. The outlook really hinges on the trajectory for mortgage rates and how lenders assess affordability over 2024. The Bank of England is projecting inflation to fall to its target in H1 2025 so mortgage rates falling faster in 2024 would support sales and pricing.’
The report adds that house price falls have been modest over 2023, compared to a 20% reduction in buying power. Mortgage rates look set to remain higher for longer into 2024, meaning income growth will be the main factor to reset housing affordability and support sales. ‘Our 2023 forecasts look spot on with two months to go - transactions of 1m and house price falls of up to 5%.’
House price falls extend across the country
Higher mortgage rates and the cost-of-living squeeze have hit buyer demand. The first half of 2023 registered a rebound in demand as mortgage rates fell towards 4%. A jump in borrowing costs over the summer has reduced demand once again. It is a fifth lower on an annual basis and 25% below the 5-year average for October.
The result has been a rapid slowdown in price growth from +9.2% a year ago to -1.1% today, says Hometrack. Other indices, based on mortgage lending, have registered larger annual falls, while the ONS’ House Price Index was at +0.2% in July.
Southern England has been at the forefront of price reductions to date, but these are now spreading further afield. ‘Our localised house price indices show that 4 in 5 housing markets are registering annual price falls, up from less than 1 in 20 just six months ago. The scale of price falls is modest, limited to very low single digits. No markets are registering annual price falls over 5%. We expect to start seeing some markets register annual price falls over 5% in the coming months as pricing continues to adjust in the face of weaker buying power.’
Hometrack says that the largest annual price falls are at larger, postal area level, are being recorded in Colchester (CO) where prices are 3.5% lower over the year. This is followed by Canterbury, Luton and Brighton – all London commuter areas. Prices in Halifax (HX) are 3.6% higher than a year ago and 2.4% higher in the Motherwell (ML) postal area in Scotland.
Why haven’t house prices fallen more?
The firm states: ‘House prices have defied predictions of much larger falls in 2023. The economy continues to grow, albeit slowly, while unemployment remains low and incomes are increasing. Lenders are supporting customers to refinance, limiting the number of forced sellers. Tougher mortgage affordability testing since 2015 has also built resilience into the market. This stopped households using ultra-cheap mortgage rates to take on unsustainable levels of debt.
‘In the past this would have pushed house prices much higher, making double-digit price falls far more likely once demand fell. While new mortgaged buyers may have been paying just 2% for their mortgages, they still had to prove to their bank they could afford a 7% rate. This means most mortgaged buyers can afford higher rates as they remortgage. However, banks are currently stress testing new borrowers at 8-9%, even though the borrower is paying 5%, which is compounding the reduction in buying power and hitting sales.’
But the appetite to move home remains
Hometrack concludes: ‘It's clear from our recent consumer survey that there are parts of the population that remain keen to move. However, they have been biding their time in 2023 and waiting for the outlook to become clearer – in particular, the likely trajectory for mortgage rates and house prices.
‘The risk of a major collapse in prices is becoming less of a concern, meaning home buying decisions hinge more on the financial ability and willingness of people to move when mortgage rates are in the 4- 5% range. It’s unclear how many people are hoping and/or waiting for mortgage rates to get even lower again.
‘At the same time, household finances have been under pressure from rising living costs and inflation eroding any growth in incomes. This is now reversing at last and real income growth is important to support demand. We expect cash buyers to remain a larger buyer group in 2024, along with FTBs as rents continue to rise at a rapid pace.’
