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  • Writer's pictureInvestment Synergy Team

How far will house prices fall?

Carol Lewis - The Times

This week a think tank predicted that average house prices could fall by 25 per cent over the next five years. The Resolution Foundation said in its report Peaked Interest?: “With inflation-adjusted house prices already down by 7 per cent since mid-2021, this implies substantial real-terms reductions in house prices are still to come, although there is significant uncertainty over how long that adjustment might take.

“Taking account of inflation, if house prices were to reach their new level over the next five years, this would imply further nominal price falls of some 25 per cent, taking the average house price from £287,000 today to around £215,000.”

And yet Office for National Statistics data published this week shows that house prices were still up on a year ago in May (the latest figures), albeit by less than 2 per cent.

Predicting property price movements is a notoriously difficult art, so what do those who compile industry forecasts think will happen to the cost of homes?

Andrew Wishart, head of UK housing service, Capital Economics The rise in mortgage rates from record lows to about 6 per cent has reduced the size of loans that buyers can afford to take out. This has already prevented many people from buying, leading to a decline in transactions that we expect to continue until mortgage rates and house prices are low enough to make buying a home affordable again. Longer mortgage terms and bigger deposits have helped to bridge the gap between what buyers can pay and the level of house prices, but ultimately we think a further drop in house prices is necessary.

The low number of homes on the market has limited house price falls, and we doubt we will see widespread homeowner arrears and repossessions because unemployment is low and borrowers have been stress-tested at interest rates above what they now face. Even so, the number of homes on the market is approaching more normal levels, in part because limited buyer interest means it is taking longer to sell.

We also expect the particularly severe increase in mortgage payments faced by landlords to force them to sell a substantial number of rental properties. London and the southeast are where the cost of buying with a mortgage is most expensive and where there is the highest concentration of privately rented homes, so the largest drop in house prices is likely to be there.

Medium-term house price predictions depend on three key factors: mortgage rates, pay and sentiment — all of which are uncertain, explaining why the range of predictions is vast. If you assume that pay stagnates, mortgage rates stay at 6 per cent and sentiment collapses your forecast would be a 30 per cent drop in house prices. We think that sentiment will weaken as the economy falls into recession, but we forecast that average pay will continue to rise and that mortgage rates will fall next year. On that basis, a 10-15 per cent fall in prices is the most likely outcome.

Forecast House prices fall by 12 per cent between the peak in August 2022 and the end of 2024 (4 per cent has already happened).

Martin Beck, chief economic adviser for the EY ITEM Club The housing market is facing probably the toughest backdrop since the global financial crisis of 2008-09. Mortgage rates have soared over the past 12 months, and households’ finances are suffering the effects of a prolonged period of high inflation. But despite what appears to be the ingredients for a house price crash, the EY ITEM Club is more sanguine, expecting a gradual deflation in values, not a serious and sudden fall.

Average values are down from their peak in summer 2022. But as of June, the drop had been limited to 2.6 per cent on the Halifax measure and 4 per cent according to Nationwide, eroding only a small part of the near 25 per cent rise in values between the start of 2020 and mid-2022. On the Halifax measure, prices have actually risen since the start of 2023.

The Club thinks an improving inflation outlook means the market view that the Bank of England rate will peak at close to 6 per cent is too aggressive, and that the Bank rate will stabilise after one or two further hikes. If we’re correct, mortgage rates should fall back over the second half of this year, albeit to levels still high by the standards of the past decade or so.

While house prices are likely to drift down, a serious correction should be avoided. Unemployment is low, and the financial position of UK households is unusually healthy, reflecting the paying down of debt and high savings rates of recent years. Mortgages are disproportionately held by better-off households, a group that holds most of the sizeable unplanned savings built up during the pandemic. These factors should insulate borrowers against the immediate shock of higher borrowing costs, as will increased forbearance on the part of lenders, including extending mortgage terms.

Forecast House prices will fall about 10 per cent peak-to-trough, but the decline is likely to be gradual, spread out over this year and next.

Lucian Cook, head of residential research at Savills estate agency There is little doubt that the increased costs of mortgage debt are going to constrain buyers’ budgets over the next 12 months. Potential homebuyers have become more cautious about the level of debt they are prepared to take on. But, as importantly, it has become much trickier to meet lenders’ affordability criteria. A lot of mortgaged buyers will simply put plans on hold until things settle, while others will scale back what they can afford.

That said, we don’t suddenly expect to see a lot of stock hit the market from existing homeowners. Large numbers are still hanging on to a fixed rate, while those facing a steep increase in mortgage costs have the option of going interest-only or extending their mortgage term to get them through this period of elevated mortgage costs. Mortgaged buy-to-let investors don’t have the same options, but overall, this points to a lower transaction market, more weighted to cash and equity-rich buyers.

Headline price falls are likely to be a feature of the market over the next 12 months, but in our opinion they won’t be to the same degree as in the early 1990s or in the wake of the credit crunch. We’d also expect a bit more variation across different tiers of the market.

Forecast The price falls of about 10 per cent that we forecast for 2023 are now expected to straddle this year and next, as rates stay higher for longer.

Aneisha Beveridge, head of research at Hamptons estate agency The pace and extent to which interest rates have risen caught most people by surprise. This has left would-be buyers and sellers in a state of inertia, meaning transaction numbers rather than prices have borne the brunt of the slowdown.

Tighter stress-testing introduced in 2014, a robust labour market and extensive equity in the housing market will continue to limit the number of forced sales and put a floor under prices this year. More-affordable areas will perform best as buyers’ budgets shrink in line with the economic realities. Consequently, higher rates may have been the tonic needed to start closing the gap between flat and house prices.

While a lot is riding on inflation falling quickly, mortgage rates are likely to be lower next year than they are today. This may create a bit of capacity for prices to grow and transaction numbers to rise in 2024. However, the likelihood that rates will remain higher than we’ve been accustomed to since the 2008 financial crash will weigh on price growth in the medium term, and will level the playing field between renters and younger homeowners.

Forecast House prices to fall between 0 and 5 per cent in the final three months of 2023 compared with the same period in 2022.

Richard Donnell, executive director at Zoopla property portal The housing market is in a transition phase from ultra-cheap borrowing costs to mortgage rates averaging 4-5 per cent over the next two years, lower than they are at present. The greatest impact is on the numbers of sales, which will be 23 per cent lower than last year at one million.

Tighter mortgage-lending standards since 2015 have built resilience into the market compared with previous economic cycles. A strong labour market and record immigration is providing important support for demand. The biggest risk to the housing market would be a big increase in unemployment, which would hit prices harder.

While forced sales and repossession will be much lower than historically, higher mortgage rates have reduced buying power by 10-20 per cent since the spring. This has a bigger impact in higher-value markets.

We expect to see above-average price falls in markets across southern England with average prices over £400,000, although there is a large equity buffer to absorb price falls.

Forecast House prices are set to fall by up to 5 per cent this year and will then be broadly flat, with annual price changes between minus 2 per cent and plus 2 per cent over 2024 and 2025. We expect sales to range between 950,000 and 1.15 million a year.

Robert Gardner, chief economist at Nationwide Building Society It remains extremely difficult to chart the course for the UK economy, which will be crucial in determining housing market prospects. The enormous uncertainty is evident in the fluctuations we’ve seen in financial markets as investors have revised their expectations of how much the Bank of England will need to raise interest rates to get inflation under control. Financial markets have moved from pricing a 5 per cent Bank rate peak in mid-May to a 6.5 per cent peak in early July, although in recent days they have suggested it will top out at about 6 per cent. These shifting expectations are the key factor that has driven mortgage rates higher.

The number of housing market transactions is likely to remain subdued in the coming quarters because the higher mortgage rate environment has fundamentally changed the affordability calculation for many potential buyers. Nevertheless, a relatively soft landing for house prices is still possible, providing the broader economy performs as we expect.

If labour market conditions remain relatively solid, with the unemployment rate staying below 5 per cent, we should avoid the waves of forced selling that are probably necessary to prompt a more significant near-term decline in house prices.

Mortgage rates may start to fall back later in the year. Combined with healthy rates of income growth and modestly lower house prices (which have already declined by about 4 per cent from their August 2022 peak and may fall a few percentage points more) this will improve housing affordability over time.

Forecast We are updating our forecasts. Our previous one was for a 6.5 per cent fall from the peak to the end of 2023.

Charlie Lamdin, founder of BestAgent property portal and presenter of Moving Home with Charlie The house price reporting time lag effect is claiming many victims in 2023. There’s no national average visibility of what’s happening at the front lines of estate agency, but even the hardiest, career-long agents are bracing hard as the effects of the 2023 homemoving market bite.

There are more than five times as many homes listed as “for sale” as there are “under offer” or sold subject to contract. This ratio of 5:1 is up from 3:1 a few months ago. Why? Because of the number of sellers (and agents) caught off guard by the pace of price falls, listing homes at prices that are getting little if any interest.

The other compounding time lag that needs to be taken into consideration is how long it takes for the effects of interest rate changes to feed through to house prices, which is typically a year. A significant number of people who decided to buy and began the process in January will not be moving in until the autumn, and the prices of these transactions won’t be reported for several months after that.

For the next six months mortgage rates can, at best, be expected to remain as they are. What’s more likely is that they will continue to increase slightly as the Bank of England continues on with its hitherto unsuccessful battle against inflation for the rest of 2023. I expect mortgage rates will peak in the first three months of 2024.

House prices are being propelled downwards by the combination of rising mortgage rates, mortgage holders reaching the end of low fixed rates, shrinking in real wages, growing unemployment, falling job vacancies and accelerating insolvencies. Even without that distasteful cocktail of house price killers, the time lag effect means that we won’t see the worst effects of 2023’s rising rates until the end of 2024.

Forecast By the time the Land Registry reports on completions for transactions happening towards the end of 2025, we’ll see national average house prices down about 35 per cent, with regional variations ranging from falls of 15 per cent to 50 per cent. These are nominal figures. Real values will suffer more.

Investment Synergy - the vagaries of the UK property market has always been thus .... inflation and mortgage rate changes abound... impacting as always the property market, unless there is a urgent need to sell, no one loses by keeping their heads and just waiting out the market ... there is no "value" lost or gained, unless the asset is realised!

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