Will house prices fall in 2023? - Times Money Mentor (2024)

House prices could fall by 10% over the next two years due to rising mortgage rates and the squeeze on household incomes, according to forecasts from the Office for Budget Responsibility.

Nationwide Building Society said house prices had fallen by 1.1% in the year to February, the biggest annual fall since 2012. Yet figures from Halifax paint a different picture, with prices rising by 2.1% over the same period.

The UK property market has been overheated for years and house prices grew by 10% during the pandemic.

In this article we explain:

• Why are house prices so high?
• Have house prices dropped?
• What are the regional variations in house prices?
• How do 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 supply and demand. So a shortage of housing stock and high demand for properties has affected prices.

And while this is certainly a factor, low interest rates had also been powering the housing market in recent years. People were more able to afford mortgages because they could borrow cheaply. This has now changed as interest rates have been rising.

Since December 2021 the Bank of England has increased the base rate eleven times from its record low of 0.1%. The base interest rate now sits at 4.25%.

This has been in response to soaring inflation, which hit 10.4% in the year to February.

Higher mortgage rates have made it more expensive to purchase a home. This has led the housing market to take a knock, with prices falling for four months in a row.

There was more demand at the start of 2023 following a fall in mortgage rates from their October peak. But prices have been falling as we explain in the next section.

Further rate rises are expected in 2023. This 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.

First-time buyers are expected to hold off as they wait to see what happens. This hesitation could in turn impact the market.

Read: Should I register as an LLC to buy a house?

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 has fallen by between 20% and 50% during the year to February. However, they rose slightly in January following recent dips in average mortgage rates. It said that sellers are discounting asking prices by an average 4.5%, or £14,000, to try to reach a sale.

Another property website Rightmove said asking prices defied expectations in January 2023 by rising 0.9% that month. However, it also flagged they increased by just £14 in February, a change of 0%. This marks the smallest change for this time of year on record.

It’s understood asking prices levelled out because sellers priced their properties more fairly. They are thought to have been motivated by a fear of missing on spring demand due to overpricing.

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

Halifax house price index

Halifax is the UK’s largest mortgage provider. Its latest figures showed house prices increased by 1.1% in February compared to the previous month. Prices barely moved in January.

This increase followed a 1.5% fall in prices in December and a 2.3% fall in November.

The average house price is now £285,476, compared to £281,684 in January.

Meanwhile, growth actually increased to 2.1% over the year, up from 1.9%. However, it’s still a significant drop from June’s high of 12.5%.

The lender has said it would be foolish to rule out significant annual price drops this year.

There is uncertainty around how much rising interest rates and the cost of living crisis will affect the housing market.

Average two-year fixed mortgage interest rate rose to 6.55% in October, though this has now cooled to less than 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.

We have more on how to avoid paying too much for a house.

Nationwide house price index

House prices dropped 1.1% in the year to February, according to Nationwide Building Society. This is the largest annual fall since 2012 as buyers struggle with higher mortgage and living costs.

Looking at monthly figures, prices fell 0.5% in February, marking the sixth monthly decline. The average home in the UK is now worth £257,406.

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

Robert Gardner, Nationwide’s chief economist, said: “Higher borrowing costs have added to stretched housing affordability at a time when household finances are already under pressure from high inflation.”

The mortgage rate shift reflects a higher base rate of interest – currently at 4.25% – imposed by the Bank of England as part of its bid to tackle the surge in inflation.

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

Gardner said it will be hard for the market to regain much momentum this year as earnings fail to keep up with inflation and the economy shrinks.

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, all nations and regions saw a rise in annual house prices in 2022, although the rate of growth has slowed.

Nationwide 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 4.25%, 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. Mortgage rates are also falling, meaning buyers are returning to the market.

High demand 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 March 2023, the Office for Budget Responsibility (OBR), the government’s independent forecaster, predicted that house prices would fall 10% over the next two years. It said that property transactions are expected to drop 20% over the same period, caused by the rise in mortgage rates and the squeeze on household incomes.
• In January 2023, Halifax predicted that house prices would fall around 8% over the year. But it said that a drop of 8% would mean the cost of the average property returning to April 2021 prices, which still remain significantly above pre-pandemic levels
• In December 2022, Robert Gardner from Nationwide said house prices are likely to see a more 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, Wesley Davidson, founder of mortgage broker Fox Davidson, said he thought the average UK house price will drop by about 10% in 12 months

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

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.

Asking prices increased 0.9% in January 2023, taking the average price to £362,438, according to property website Rightmove. However, demand from home buyers is down 36% compared to January last year.

Zoopla’s house price index for February found that sellers are being forced to reduce asking prices by an average of 4.5%, or £14,000, in order to reach a sale.

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.