Where is next for house prices?

With interest rates rising and the cost-of-living crisis squeezing everyone’s income, what is the outlook for property prices for the rest of 2023? Here’s a round up of where we are now and forecasts for the future.

A bumpy ride

Those who are relatively new to the housing market could be forgiven for thinking that property is an asset that always rises. After all, ten years ago the average property price was around £170,000. Today it is nearly £300,0001.

However, those of us who remember the late 1980s and early 1990s might remember the house price crash when many mortgage holders found themselves in negative equity – owing more on their properties than the properties themselves were worth.

Property is not a one-way bet, and some have predicted that the current economic situation could precipitate a crash. There has already been evidence that the market has softened, from the main sources of data that are used to show how house prices are changing over time.

Differing data, same story

House prices indices from major mortgage lenders Halifax and Nationwide are one way to look at how house prices are doing. The Nationwide survey has shown a slowdown in house price growth since August. According to the building society, the average house price fell in October, November and December compared to the previous month, and by January prices were 3.2 per cent below their peak at the height of summer 20222.

Halifax, calculated on a similar basis to Nationwide, by looking at mortgage data, shows a similar picture. House prices have fallen all winter, and Halifax calculates the average home is now 4.2 per cent below its peak August price3.

However, the most recent figures showed month-on-month stability, with no material change in the average house price, which is now £282,000.

The third major index, the Office for National Statistics (ONS), uses data on house prices that have been sold and registered with the Land Registry. This means it takes longer for changes in pricing to filter through to this index. It shows a record high in house prices in October, falling in November.

Whichever index you are looking at, the narrative is similar, house prices were very high in the summer and have fallen back since.

What is driving a fall?

Most of us are feeling the factors behind falling house prices. The rising cost of living means that many people are less confident about taking on a larger and more expensive mortgage. Borrowers may also find it harder to get funding if lenders see how squeezed their monthly income is.

Then there is the rise in interest rates, which means that mortgage payments are more expensive than they have been previously.

Interest rates are now at a 14-year high. Mortgage rates rose hugely after Kwasi Kwarteng and Liz Truss’ ‘mini budget’ last Autumn, which caused market turmoil. They have since fallen back somewhat, with HSBC launching a five-year mortgage rate below five per cent this week4.

Falling prices may also be partly due to huge house price inflation in recent years. The stamp duty holiday during lockdown may have distorted figures as people rushed to complete transactions within a set period, which means prices rose and this may influence comparisons.

And of course, different types of property in different areas of the country are behaving differently when it comes to valuations and demand.

According to the Halifax index, house prices in Wales and the South West saw growth slow considerably, while the North East and Scotland has proved more resilient5.

The Government’s ONS index shows that flats rose in price less than houses over the year October 2021 to October 2022, with terraced houses showing the largest percentage increase in value6.

What happens next?

Experts believe that there will be a slowdown in prices, but a lack of supply on the market, plus increasing signs that interest rates are near their peak could prevent a crash.

“We expected that the squeeze on household incomes from the rising cost of living and higher interest rates would lead to a slower housing market, particularly compared to the rapid growth of recent years. As we move through 2023, that trend is likely to continue as higher borrowing costs lead to reduced demand,” said Kim Kinnaird, Director, Halifax Mortgages,

“For those looking to get on or up the housing ladder, confidence may improve beyond the near-term. Lower house prices and the potential for interest rates to peak below the level being anticipated last year should lead to an improvement in home buying affordability over time.”

Jeremy Leaf, a north London estate agent, and former chair of RICS (Royal Institution of Chartered Surveyors) says prices are stabilising.

“Looking forward, we are anticipating small ups and downs in prices but no major correction, particularly now more stock is beginning to become available.”

What should I do now?

If you’re buying a property, it makes sense to negotiate hard in a softening market but be aware that demand is out there. Ensuring you get the best mortgage deal possible and have an agreement in principle in advance will help you to know how much you can borrow.

If you are selling, consulting experts to price your property correctly and ensure that it is in good condition to appeal to sellers will help you to attain the best possible price. As the course for inflation becomes clearer in the coming months, we may have more insight into where mortgage rates will be going forward, which will have a huge effect on the market.

13th February 2023