Will house prices fall in 2023?

                                             By Hannah Smith

A spike in the cost of mortgage borrowing could cause the UK property market to crash, following the largest monthly fall in house prices since 2008.

The market has been overheated, with property prices seeing annual growth of more than 10% during the pandemic. But property prices are now falling.

In this article we explain:

.  Why are house prices so high?
.  Have house prices dropped?
.  What are the regional variations in house prices?
.  How to house prices differ for different types of property?
.  Will house prices crash in 2023?
.  What are the house price predictions?

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Why are UK house prices so high?
House prices are falling from their dizzying heights during the pandemic (more on this below). However, they are still very high by historical standards and have been rising much faster than wages.

The average price of a UK home has nearly trebled since the turn of the century. Prices have increased by more than 60% over the last ten years, according to Nationwide building society.

On the surface, it looks like the main long-term driver has been simple supply and demand: a shortage of housing stock and high demand for properties.

While this is certainly a factor, low interest rates had really been powering the housing market since the onset of the pandemic. The ability to borrow cheaply makes it easier for people to afford mortgages.

Yet since December 2021 the Bank of England has increased the base rate nine times from its record low of 0.1%. The base interest rate now sits at 3.5%.

This has been in response to soaring inflation, which hit 10.7% in the year to November.

Higher mortgage rates have made it more expensive to purchase a home, and the housing market has started to take a knock, with prices dipping in recent months. Further rate rises are expected in 2023, which could seriously dampen the housing market because it means mortgage repayments will increase.

The cost of living crisis is likely to be the biggest cause of a slowdown in the housing market. As household budgets come under pressure, fewer people can afford to stretch themselves to buy homes.

It’s thought that some first-time buyers will hold off as they wait to see what happens which could have an impact on the market.

Have house prices dropped?
House price shows that house price growth is slowing and even reversing. This is because demand from buyers has starts to wane as their living costs rise.

Property website Zoopla said that demand for housing had dropped by 50% in the year to December 2022.

Below we outline the house price figures from two major lenders.

Nationwide house price index
House prices grew by 2.8% in the year to December, falling from annual growth of 4.4%, according to Nationwide Building Society.

It also marks a 0.1% monthly decline in house prices, the fourth monthly fall in a row. House prices now average at £262,068.

In November Nationwide reported a 1.4% drop, which was the largest since June 2020, at the height of the Covid pandemic.

“The market has undoubtedly been impacted by the turmoil following the mini-budget, which led to a sharp rise in market interest rates,” said Robert Gardner, Nationwide’s chief economist.

“Higher borrowing costs have added to stretched housing affordability at a time when household finances are already under pressure from high inflation.”

Halifax house price index
The most recent figures from Halifax, the UK’s largest mortgage provider, showed a 2.3% fall in prices in November. This marks the third monthly dip in a row and the largest since the 2008 financial crisis.

Meanwhile, annual growth also slowed from 8.3% to 4.7%, a significant drop from June’s high of 12.5%.

The lender – the UK’s largest mortgage provider – has said “it would be foolish to rule out significant annual price drops in the coming months.

“It’s not just that rates are now higher, but buyers have had an unsettling shock, which could have a long-lasting impact on their willingness to take the plunge.”

It spoke up after the average two-year fixed mortgage interest rate rose to 6.55% in October, though this has now cooled to under 6%. Here’s more detail on the average mortgage rates and how they have changed.

This has seen households paying the greatest portion of their income on mortgage payments since 1989 at a time when the rate of inflation is running near a 40-year high.

The mortgage rate shift reflects a higher base rate of interest – currently at 3.5% – imposed by the Bank of England as part of its bid to tackle the surge in inflation mostly caused by the fallout from Russia’s war in Ukraine.

However, it also pointed to factors supporting prices including the shortage of new homes, strong wage growth and cuts to stamp duty revealed in the government’s mini-budget.

Nationwide, Halifax and Rightmove differ in their house price estimates because the representative properties they track are slightly different. We have more on how to avoid paying too much for a house.

What are the regional variations in house prices?
There are a number of regional variations in property prices, with areas seeing different levels of growth.

However, Nationwide figures showed a marked slowdown in annual house price growth in all regions around the UK in the final three months of 2022.

It compared average house prices between October and December to the same period in 2021:

.  East Anglia was the strongest performing region in England, with average prices increasing by 6.6% compared to the same three months in 2021
.  Scotland was the weakest performing region, with house price growth of 3.3%
.  Wales saw a significant slowdown in growth, slowing to 4.5% from 12.1% in the previous three months
.  Northern Ireland saw prices increase by 5.5%, much weaker than the 12.1% rise recorded in the final three months of 2021
.  House price growth was second slowest in London. But prices in the capital are still the highest in the UK at £528,000, almost double the UK average

How do prices differ for different types of property?
The pandemic caused huge shifts in housing preferences and mortgage lenders have continued to see differences in price trends between property types.

Since the onset of the pandemic, prices of detached, family homes are growing much faster than flats.

Many workers are continuing to work from home a few days a week, so there is still demand for larger properties with space for a home office. While this hybrid model for working continues, so will the trend for larger properties.

Figures from Nationwide Building Society show that the average price of:

.  A detached property increased by 26%, or nearly £78,000 in cash terms between 2020 and 2022. Looking at just 2022, detached properties increased by 5.9%
.  Flats increased by 13.4% on average, or £23,000, between 2020 and 2022. Looking at just 2022 the average price of flats increased by 2.1%

Figures from the Office for National Statistics show a slightly different trend, with semi-detached and terraced houses rising in price the most. In the year to October 2022 show that the average price of:

.  Detached houses reached £468,376, up 12% over the year
.  Semi-detached house prices hit £287,383, an increase of 14%
.  Terraced houses hit £242,690, an increase of 14%
.  Flats reached £235,237, an increase of 8.6%

Is there a greater demand for rural locations?
With working from home likely to be a more permanent part of many people’s lives, demand for properties outside cities has jumped.

Lockdowns highlighted the value of greenery and space, triggering a surge of interest in properties in rural and coastal areas, according to ONS statistics.

House prices in some hotspots have risen at three times the national rate. These include places like:

.  Conwy in North Wales
.  North Devon
.  Richmondshire in the Yorkshire Dales

Estate agents report significant interest in rural and remote properties in Scotland.

With that said, some people have started to return to cities and commuter belts, which has driven up the average price of properties in these areas.

Will house prices crash in 2023?
While we can’t say for sure what the future holds, recent rises in the UK base interest rate have sparked fears that the market might crash.

After the controversial September mini-budget, many mortgage providers withdrew deals and hiked rates, pushing up the cost of mortgages across the board.

Now that the Bank of England has raised the base interest rate to 3.5%, these effects could be further amplified. This is expected to reduce demand among potential buyers and cause house prices to fall.

There are additional factors that could put a dampener on the extreme growth seen in recent years, namely the cost of living crisis. Record prices for petrol, energy, rising inflation and tax rises mean most households have less disposable income to spend on buying houses.

While annual house price growth has so far remained high across the board, house prices are now falling month on month. If demand slows down and people have smaller deposits, the rate of house price growth could fall further.

But that’s not to say property prices will crash as demand still tends to outstrip supply of homes in many areas across the UK. This is likely to cushion the blow, meaning house prices could fall rather than crash.

House price predictions
Given the continued race for space, many housing market predictions remain bullish. However, the perfect storm of high inflation and interest rates is set to dampen the housing market.

Here are some predictions of what’s in store:

.  In December 2022, Robert Gardner from Nationwide said house prices are likely to see a modest decline in 2023 of around 5%. He said there would need to be a significant deterioration in the labour market to generate the double-digit falls that have been suggested by some forecasters
.  Lloyds Bank has forecast house prices to fall by 8% in 2023. It has set aside £668 million to cover bad debt, which could arise due to borrowers struggling to make repayments
.  The Office for Budget Responsibility has projected that prices will fall by 9% between 2022 and 2024, before starting to rise again throughout 2025
.  In November 2022, property website Zoopla said it expected prices to fall by 5% in 2023
.  The Bank of England has predicted house price growth to slow down later on this year, with mortgage providers expected to cut down on lending as the economy struggles
.  In July 2022, property website Rightmove said it expected house price growth to slow to 7% for 2022 as a whole
.  Also in July 2022, Wesley Davidson, founder of mortgage broker Fox Davidson, said he thought the average UK house price will drop by about 10% in 12 months
.  Halifax warned of a “significant downward pressure” on prices as mortgage costs rise. It said the price trend suggested a downwards path in the short term due to affordability concerns

High inflation has caused interest rates to rise and this is set to continue, which is slowing the housing market down.

Asking prices are falling, with 23% of homes for sale in October seeing a reduction in their price, according to Rightmove.

Zoopla’s house price index found that sellers have been forced to reduce asking prices by an average of 4% in order to reach a sale in recent weeks. Surveyors are also reporting fewer enquiries from new buyers.

All of this will have a knock-on effect on what house prices are sold for as reduced demand means more buyers can negotiate on the price of properties.

So far the slowdown has been modest but it could pick up the pace swiftly as interest rates continue to rise.

The good news is that home buyers can now save some money on tax with the cut in stamp duty rates.

Is now a good time to buy a house? We help you weigh up the pros and cons.