House prices didn’t crash in 2023 but they did drop as the cost of living crisis and higher mortgage rates weighed on buyer budgets while sellers cut prices to attract interest.
The latest Nationwide House Price Index shows average property prices ended the year down 1.8% annually.
It is the first data showing how the market performed over the 12 month period.
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Meanwhile, Office for National Statistics (ONS) data shows average house prices dropped by 1.2% in the 12 months to October.
That’s double the 0.6% drop in house prices recorded in the year to September, which was itself the first annual drop recorded by the ONS in a decade.
Data from property website Rightmove shows average asking prices fell by 1.9% between November and December, a steeper drop than usual as sellers attempt to lure buyers from Christmas festivities to view their homes.
It comes as price reports from Halifax and Nationwide showed throughout much of 2023 that prices were down annually.
However, the latest Halifax House Price Index shows property values rose by 0.5% in November, the second consecutive monthly increase, to £283,615.
They were still down 1% annually, which was an improvement on the 3.2% drop registered a month before.
It may be a bit premature to see this as a sign of recovery though as Halifax attributed the increase to a lack of property stock rather than buyer demand improving.
This is why it is worth checking all house price reports as each relies on different data. While Halifax and Nationwide’s indices refer to their own mortgage lending activity, the ONS gives a broader overview of all sales in the market, including from cash buyers. However, its data is typically around two months behind the market due to how long it takes for sales to be recorded with the Land Registry.
Meanwhile, property website Zoopla has said house prices have fallen across 80% of the UK as the cost of living crisis dents demand and buyer budgets as high mortgage rates reduce their purchasing power and impact affordability.
While house prices experienced spectacular growth throughout the pandemic, that seems to have come to an end. Average mortgage rates for two-year and five-year fixed deals are around the 5% – 6% mark, significantly higher than the 2% rates seen at the beginning of 2022.
As the property market faces its biggest challenge in decades, what is the outlook for the rest of the year and into 2024?
Is there buyer demand for property?
High mortgage rates and the cost of living crisis have dampened demand in the housing market for much of this year and the outlook isn’t looking much better at least over the short term, the Royal Institution of Chartered Surveyors (RICS) has warned.
Its Residential Market Survey, which gives a sense of what is going on at the coalface of the property market, has been gloomy for most of the year and the latest research shows indicators on demand, sales, instructions and house prices all remain in negative territory.
The sales that do go ahead are also taking longer: the average is 20 weeks from listing to completion, up from 16 weeks in late 2021.
“With mortgage affordability still incredibly stretched, it is unsurprising that buyer activity across the housing market remained subdued in September,” says Tarrant Parsons, senior economist at RICS.
“Although the decision to pause monetary policy tightening [when base rate was held at 5.25% for the second consecutive month in November ] provided a glimmer of relief for the market, interest rates are likely now set to remain on hold for a prolonged period.
“As such, it appears there is little prospect of trends deviating much from the recent picture in the immediate future.”
Graham Cox, founder of Bristol-based broker, Self Employed Mortgage Hub, says prospective buyers should sit tight: “Unless you really have to, there’s very little incentive to buy now when it’s almost certain that property prices and possibly mortgage rates will be lower in six months’ time.”
However, Darryl Dhoffer, director at Bedford-based broker, The Mortgage Expert, stresses that people should buy when the time is right for them: “People need to look at properties as their homes and not short-term investments, and need to act now if the time is right for them. Historically, time in the property market is better than trying to time it.”
Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, warns that there are risks to a ‘wait and see approach.’
“Even if mortgage rates fall, if buyers and sellers return in their droves, it’s going to mean more competition, and it could push prices higher,” she says.
“What you save through a lower mortgage rate you could lose through higher prices.”
HOW IS THE HOUSING MARKET PERFORMING?
House prices experienced rapid growth throughout the pandemic thanks to a combination of stamp duty cuts, low interest rates and the “race for space”.
However, the combination of rising interest rates and the cost of living crisis started hitting buyer confidence last year – and house prices have been falling since.
“There are still significant challenges in saving up enough for a deposit and affording higher mortgage payments,” says Tim Bannister, Rightmove’s director of property science.
Nationwide said someone earning an average income and purchasing a typical first-time buyer home with a 20% deposit would spend 38% of their take-home pay on their monthly mortgage payment – well above the long-run average of 29%.
This is feeding into the housing market and sellers are cutting asking prices at the highest rate for five years to secure a sale, according to Zoopla.
Buyers are securing an average of £18,000 off the asking price of a property, Zoopla said.
While mortgage rates have been falling recently, pricing remains high. The average two-year fixed mortgage deal is currently 5.93% according to data from Moneyfacts, while the average five-year fix is 5.54%.
Of course, when we talk about UK house prices, these are averages – and there are big regional variations across the country.
The latest ONS house price data shows the North East was the sole region to see house prices grow over the 12 months to October, up 0.2%, though they remain the lowest in the UK at an average of £161,000.
In contrast, London has seen the biggest drop in house prices at 3.6%, though they remain the most expensive at an average of £516,000.
Abi Hookway, wealth coach and director at property investment firm Redmayne Smith, is bullish about the opportunities: “This data reflects the huge property demand in the north of England, which provides a great opportunity for property investors who are seeking incredible capital growth.
“Furthermore, as the Bank of England has frozen the interest rate at 5.25%, we can expect this to start decreasing over the next 12 months, which will therefore see house prices increase at an even faster pace.”
Figures from banking trade body UK Finance suggest a quieter few months ahead for the property market.
Mortgage lending was weak during the third quarter, UK Finance says, with the number of mortgages for home movers down by around 25% annually, while lending to first-time buyers was down 20%.
What will happen to house prices in 2024?
Much of the direction of the housing market and property prices will depend on mortgage pricing.
Analysis by Go.Compare suggests that if mortgage pricing stays at the current rate of around 5.3% on average, house prices could increase by 5.92% by September 2024.
However, a 1% increase to 6.3% would mean a 4.66% decrease in completion price value, the comparison website claims.
If mortgage rates fall another per cent to 4.3%, homeowners could see 10.5% added to their house price, Go.Compare said.
That is a pretty bullish view though compared with other forecasts.
Zoopla has predicted that UK house prices will fall by 2% during 2024 based on mortgage rates dropping to 4.5% by the end of the year and remaining there into 2025.
The property website also estimates there will be one million sales in 2024, but it suggests this could be higher if mortgage rates fall back towards 4%
Rightmove has forecast that asking prices will drop by 1% as sellers become more realistic to secure a sale amid higher borrowing costs for buyers.
Knight Frank expects property prices to drop by 5% in 2024. Analysts at Capital Economics predict house prices will fall by 5-6% by mid-2024, because “we think that mortgage rates will stay around their current high level until next summer”.
Lloyds Banking Group thinks prices will continue to slide, and will not start to recover until 2025. It is predicting a decline of 2.4% in 2024.
Halifax has predicted that house prices will fall between 2% and 4% in 2024 as economic market conditions and “affordability pressures” continue to put pressure on the property market.
In a separate report, Nationwide said it also expects a single digit decline in house prices in 2024 – or for them to simply remain flat.
Savills estimates that the market will “bottom out” around the middle of this year.
Its latest five-year forecasts predict the average house price will fall by 3% in 2024 but will be followed by price increases in 2025, 2026, 2027 and 2028 as affordability pressures slowly ease.
Prime central London is expected to see the least downward pressure on prices, given much less reliance on mortgage debt and the relative value on offer to a range of wealthy domestic and international buyers.
Transactions are expected to remain at around 1.01m in 2024, rising to 1.16m per year at the end of the forecast period in 2028, as mortgage buyers gradually return to the market.
“Interest rates are expected to have peaked and the worst of the house prices falls look to be behind us, but the first cut to rates still looks to be some way off,” says Lucian Cook, head of residential research at Savills.
“This means continued affordability pressures are likely to result in further modest house price falls over the first half of 2024, resulting in a peak-to-trough house price adjustment in the order of minus 10%.
“The expectation of a gradual reduction in rates suggests a progressive restoration of buying power and steady recovery in demand.”
