Our forecasts for the housing market a year ago were more optimistic than many others. It’s now looking like we called it right, with 1 million transactions and house price falls of up to 5% in 2023.
But these lower house price falls mean the adjustment to higher mortgage rates will run into 2024.
And this transition is not a quick one. Mortgage rates look set to remain higher for longer so income growth is key to reset housing affordability and support sales.
House price falls extend across the country
Higher mortgage rates and the ongoing cost-of-living squeeze have hit buyer demand. There was a rebound in the first half of 2023 as mortgage rates fell towards 4%, but rising rates over the summer stalled buyer demand yet again.
Buyer demand is now a fifth lower than this time last year and 25% below the five-year average for October.
The result has been house price inflation slowing from +9.2% a year ago to -1.1% today.
Other house price indices, based on mortgage lending, have registered larger house price falls. Meanwhile, the Office for National Statistics’ index put house price growth at +0.2% in July.
The South of England has been at the forefront of property price falls so far. But they’re now spreading further afield, with 4 in 5 housing markets seeing house prices fall over the last 12 months. This is up from less than 1 in 20 markets six months ago.
All house price falls are in the very low single digits and no markets are seeing falls of more than 5%.
However, we expect some housing markets to see 5% annual price falls in the coming months as prices continue to adjust to what people can afford.
At a postal area level, Colchester has seen the biggest fall in its average house price this year - down 3.5%. It’s followed by Canterbury, Luton and Brighton, all London commuter areas.
Meanwhile, the average house price in Halifax is 3.6% higher and in Motherwell it’s 2.4% higher than a year ago.
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Why haven’t house prices fallen more?
Many people thought house prices would fall further in 2023, but several factors have prevented this.
The economy continues to grow slowly, unemployment is low and incomes are increasing. Mortgage lenders are helping customers refinance, which is limiting the number of forced sellers.
On top of this, tougher affordability testing since 2015 has built resilience into the market. It has stopped households using ultra-cheap finance to take on unsustainable levels of debt. In the past, more relaxed lending pushed property prices up quickly, leading to larger price falls once demand dropped.
This time around, new mortgage buyers have had to prove they could afford a 7% mortgage rate - even if they’re only paying 2%. This means they can afford current rates when they remortgage.
Banks are now stress testing at 8-9% for actual rates of 5%. This is compounding the reduction in buying power and hitting sale numbers.
Where are UK house prices falling in October 2023?
Fewer sales has been the main impact of higher mortgage rates
The housing market is on track for 1 million sales in 2023, a 23% drop on last year.
Many people are delaying their move or are unable to buy at 5%+ rates. The decline in sales is broadly the same across regions and property types.
A recent survey we ran found more people are ‘less eager to move’, citing uncertainty and expectations of further house price falls. However, half of respondents said their moving intentions had not changed, and 15% were more eager to move.
Looking ahead to 2024, we expect the usual seasonal uplift of buyer demand in spring.
But the current pipeline of sales is lower than this time last year and general elections tend to pause market activity.
This is why we expect another year of 1 million home moves in 2024. It could be higher if mortgage rates fall back towards 4% sooner.
Cash buyers expected to make up 30% of sales
There are currently fewer moves from mortgaged buyers while the number of cash sales is holding steady.
Cash buyers now look set to be the second largest buyer group in 2023, behind only first-time buyers.
Over the last five years, cash buyers have only accounted for 1 in 5 sales. This year, they’re making up 1 in 3 sales.
First-time buyers’ share of sales is down compared to recent years, although still holding up due to rapid rent growth. In markets with cheaper property prices, first-time buyers’ mortgage repayments are lower than rental costs - even with 5.5% mortgage rates.
There is still appetite to move home
It’s clear from our recent survey that parts of the population are keen to move house.
However, they’ve been biding their time and waiting for the outlook to become clearer. They’re looking at the likely trajectory for mortgage rates and house prices.
The risk of a major collapse in house prices is becoming less of a concern. Instead, home buying decisions hinge on the financial ability and willingness of people to take on 4-5% mortgage rates.
Real income growth is at last starting to appear and this will support people’s desire to move home. Higher living costs and inflation have eroded income growth so far this year.
Higher mortgage rates tend to impact upsizers the most - they buy bigger homes and need larger mortgages. More upsizers in the market in 2024 will be a key supporter of sales volumes. But they may need to be more flexible about what and where they buy to handle higher rates.
How will housing affordability improve in 2024?
Housing affordability needs to improve to bring more buyers back into the market and support sales volumes. Households also need to feel confident in the economic outlook.
With house prices falling only slightly and mortgage rates at 5%, UK housing remains relatively expensive right now.
The chart below plots our measure for how much house prices have been under- and overvalued over time. Our methodology looks at what an average UK household could afford to spend on a home compared to actual prices.
It shows properties were overvalued in the late 1980s and in the run-up to the global financial crisis of 2007. House prices fell in the subsequent recessions.
UK house prices to fall 2% over 2024
House prices need to fall further and incomes increase - or mortgages need to fall further - to reset affordability.
UK house prices will fall 2% over 2024, assuming mortgage rates fall to 4.5% by the end of 2024 and remain there into 2025.
The number of homes for sale is at a five-year high, so sellers will need to price competitively. This is likely to keep house price growth low or negative.
We expect UK housing to remain slightly overvalued by the end of 2024. This is despite faster income growth supporting affordability.
The outlook hinges on the trajectory for mortgage rates and how lenders assess affordability in 2024. The Bank of England is projecting inflation to fall to its target in the first half of 2025. This could see mortgage rates falling faster in 2024 than currently expected, which would increase sales numbers.
What's going to happen to the housing market in 2024?
Scope for a rebound in housing market activity as affordability improves
There is potential for the house price-to-income ratio to fall to levels not seen for a decade. This boost to affordability could give consumers the confidence to move and set the housing market up for a rebound in activity.
The affordability jump will come if house price growth is lower than the growth in household incomes. We expect this to be the case if mortgage rates stay in the 4-5% range.
While we aren’t returning to the years of very cheap borrowing, income growth outpacing house prices could help create the reset the housing market needs.
Our House Price Index is a repeat sales-based price index that uses sold prices, mortgage valuations and data for agreed sales. It uses more data than any other and is designed to accurately track the change in pricing for UK housing.