Will UK house prices decline in 2023?

The property market in the UK has experienced volatility in recent months due to consecutive interest rate hikes, which have impacted sales. The latest data from lender Halifax indicates that house prices fell by 1% in the year leading up to May.

On June 7th, the latest Halifax index revealed the largest recorded drop in UK house prices since 2012. Despite a significant year-on-year decrease, Halifax data shows that prices remained relatively stable in May, with the average property in Britain now priced at £286,532.

The decline in property value appears to align with the latest data from Zoopla, which also indicates a decrease in house prices in England over the past six months.

In this article, we will examine whether UK house prices are expected to fall in 2023 and address the following points:

  • The reasons behind high house prices
  • Recent changes in house prices
  • Regional variations in house prices
  • Differences in house prices based on property types
  • Possibility of a house price crash in 2023
  • Predictions regarding future house prices.

What’s happening with UK house prices? Different reports on house prices have presented varying pictures of the state of the British property market in recent months.

While the latest reports from Halifax and Zoopla show a decline in house prices in the UK, the most recent data from Rightmove indicates an increase in sale prices.

According to Rightmove, the average price of properties sold in the UK reached a record high of £372,894. The data also shows that house prices were 1.5% higher compared to the same month of the previous year.

However, Rightmove’s May report contradicts other recent house price indices that suggest a decrease in property value since the beginning of the year.

Halifax’s house price index, published on June 7th, indicates that average house prices fell by 1% in the year leading up to May. This marks the first annual decline in house prices since December 2012.

Nationwide Building Society reported a 3.4% decrease in house prices in the year leading up to April 2023, which is the largest annual fall since 2009.

Zoopla’s May house price index showed a 1.3% decrease in UK prices over the past six months. The data suggests that prices are no longer falling as rapidly as they were towards the end of 2022, indicating that buyers are regaining some confidence.

According to forecasts from the Office for Budget Responsibility (OBR), house prices could decline by 10% over the next two years.

What’s happening with UK mortgage rates?

House prices are decreasing from the peak levels observed during the pandemic (more details below). However, they still remain significantly high compared to historical standards and have been rising at a much faster pace than wages.

The average price of a home in the UK has nearly tripled since the beginning of the century, with prices increasing by over 60% in the last ten years, according to Nationwide Building Society.

On the surface, it appears that the main long-term driving factors behind these increases have been supply and demand. The shortage of housing stock and high demand for properties have contributed to rising prices.

While this is certainly a factor, low interest rates have also played a significant role in fueling the housing market for many years. Affordable borrowing through low interest rates enabled more people to afford mortgages. However, this dynamic has changed as interest rates started to rise.

Since December 2021, the Bank of England has raised the base rate 12 times from its record low of 0.1%. The current base interest rate stands at 4.5%.

These rate hikes were a response to soaring inflation, which reached 8.7% in the year leading up to April.

Is now a good time to buy a house?

How are mortgage rates affecting house prices? Higher mortgage rates have increased the cost of purchasing a home, leading to a slowdown in the housing market with prices declining for four consecutive months.

While there was increased demand at the beginning of 2023 following a decrease in mortgage rates from their peak in October, prices have been falling, as explained in the following section.

Further rate increases are anticipated in 2023, which could significantly dampen the housing market as mortgage repayments become more expensive.

The cost of living crisis is expected to be a major factor contributing to 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 likely to hold off on purchasing as they wait to see how the situation unfolds. This hesitation could further impact the market.

Have house prices decreased? Data indicates that house price growth is slowing down and even reversing due to a decrease in buyer demand as living costs rise.

Property website Zoopla reports that demand for housing fell by 20% to 50% during the year leading up to February. However, demand slightly increased in January following recent declines in average mortgage rates. Sellers have been reducing asking prices by an average of 4.5% (£14,000) in an attempt to secure a sale.

It is believed that asking prices stabilized as sellers adjusted their prices to align with market expectations. The motivation behind this adjustment was the fear of missing out on the spring demand due to overpricing.

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

Nationwide House Price Index: According to Nationwide Building Society, house prices decreased by 2.7% in the year leading up to April, as buyers struggled with higher mortgage and living costs. This is slightly less than the 3.1% decline observed in the year leading up to March, which was the largest annual fall since July 2009.

Looking at monthly figures, prices fell by 0.1% in May after increasing by 0.5% in April. This was the only increase recorded in the past nine months. The average home in the UK is now valued at £260,736.

Robert Gardner, Nationwide’s chief economist, stated that higher borrowing costs have added pressure to housing affordability, particularly with high inflation affecting household finances.

Gardner mentioned that recent data from the Bank of England showed some signs of recovery in housing market activity, although the number of mortgages approved for house purchase in March remained approximately 20% below pre-pandemic levels.

He also noted that, after accounting for seasonal effects, prices remained relatively flat in May.

Despite expectations of continued base interest rate hikes by the Bank of England (currently at 4.5%), resulting in rising mortgage rates, Gardner remains optimistic. He believes that the housing market may face near-term challenges but anticipates a relatively soft landing, considering the solid labor market conditions and the relatively healthy state of household balance sheets. He suggests that modestly lower house prices, combined with robust nominal income growth, could improve housing affordability over time, especially if mortgage rates moderate once the Bank Rate reaches its peak.

Halifax House Price Index: Halifax, the largest mortgage provider in the UK, reported that the annual rate of house price growth declined to 1% in the year leading up to May, compared to a 0.1% increase in April.

This marks the first annual decline in house prices since December 2012.

Looking at monthly figures, house prices remained mostly stable in May following a 0.4% decrease in April.

The data reveals that property prices have fallen by approximately £3,000 over the past 12 months and are down around £7,500 from the peak in August. However, prices are still £5,000 higher since the end of last year and £25,000 above the level two years ago.

There is uncertainty regarding the extent to which rising interest rates and the cost of living crisis will affect the housing market.

The average two-year fixed mortgage interest rate reached 6.55% in October but has since cooled down. More details on average mortgage rates and their changes are available.

Households are currently allocating the highest portion of their income to mortgage payments since 1989, while inflation is running at nearly a 40-year high.

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