Will house prices keep falling?

Will house prices keep falling?

Author Georgie Frost

Published in The Times Money Mentor 1st December 2023
Updated December 1, 2023

House prices rose 0.2% in the month to November, according to Nationwide, but still remain 2% lower than a year ago. Forecasts from Lloyds Bank and property website Zoopla expect prices to keep on falling throughout 2024. We explore where house prices could head next.

The evidence that the UK property market is struggling amid rising mortgage rates and a cost of living crisis is mounting.

Nationwide reported a drop in average house prices of 2% in the year to October, after it said prices fell 3.3% in the year to October. Halifax’s data for that period observed a similar drop of 4.7%.

Property website Rightmove reported that average asking prices fell 1.7% in the month to November. It said that the number of property sales agreed in November was 10% lower than 2019’s level.

The market’s downturn is being blamed on soaring mortgage rates affecting demand for homes, and forcing sellers to cut their prices to ensure a sale. The average two-year fixed mortgage rate has jumped from around 2.3% in 2021 to 6.05% today, though this is lower than a few months ago.

In this article, we explain:

Why are house prices so high?
What are the regional variations in house prices?
How do house prices differ for different types of property?
Will house prices crash in 2024?
What are the house price predictions?
Read more: Will UK mortgage rates go down in 2023?

Are house prices going down?
The short answer is yes; over the past year, property prices are down. The average house price fell by 2% in the year to October 2023, according to the latest data from Nationwide. September and August saw greater annual falls of 5.3%, with the latter marking the most substantial annual drop in house prices since the aftermath of the financial crisis in 2009.

However, despite yearly trends, Nationwide said that house prices rose by 0.2% in the month to October. Robert Gardner, Nationwide’s chief economist, attributed the rise to a limited supply of properties on the market, with a lack of forced selling due to a solid labour market and a low rate of mortgage arrears.

Nonetheless, Gardner indicated that this isn’t a sign that the market is on a road to recovery.

“Activity and house prices are likely to remain subdued in the coming quarters. Despite signs that cost-of-living pressures are easing, with the rate of inflation now running below the rate of average earnings growth, consumer confidence remains weak and surveyors continue to report subdued levels of new buyer enquiries.”

Data from Halifax for September painted a bleak picture of the housing market; it said that prices had fallen 4.7% in a year, or 0.4% from the month prior.

Property website Rightmove’s data for November shows average asking prices for homes fell 1.7% from the month prior. This marks the largest November drop in five years, showing an acceptance among sellers that they need to price more realistically to entice buyers.

Rightmove’s report also noted that the number of property sales agreed in November was 10% lower than the same period in 2019, but this marked an improvement from October, when this figure stood at 15%.

Falls in house prices and the number of sales have been attributed to a mixture of high mortgage rates, cost of living pressures and low market confidence.

It’s worth noting that while average house prices have generally fallen during the last year, they’re still almost 20% higher than they were before the pandemic four years ago.

Why are house prices so high?
House prices 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 and increased by more than 60% over the last decade according to Nationwide building society.

A shortage of housing stock and high demand for properties has certainly inflated prices. But a significant factor has been the low interest rates since the financial crash.

People were more able to afford mortgages because borrowing money was cheap. This is no longer the case.

Since December 2021 the Bank of England has increased the base rate 14 times from its record low of 0.1%. The base interest rate now sits at 5.25%. As a result mortgage rates have shot up.

Will house prices crash in 2024?
While we can’t say for sure what the future holds, recent rises in mortgage rates combined with the cost of living crisis have sparked fears that the market might crash. High fuel prices, energy costs and tax rises have put pressure on household budgets.

The Bank of England has raised the base interest rate 14 times in a row since December 2021, from 0.1% to 5.25%. This is expected to reduce demand among potential buyers and could see people default on their mortgage repayments, causing house prices to fall:

Lloyds Bank, the country’s largest mortgage lender, has forecast a 4.7% fall in average property prices over 2023, and a further 2.4% decrease over 2024. It expects prices to then recover slightly in 2025
Estate agent Knight Frank expects house prices to dip by 5% over 2023, before falling a further 5% during 2024
Property website Zoopla is more conservative with its forecast, estimating that house prices will fall by just 2% over 2024
Interest rates may begin to fall soon, which could drive house prices up
In its latest meeting, the Bank of England opted to hold the base rate at its current level of 5.25%. This means that interest rates could fall quicker than expected, which could make buying a home more affordable and reverse the current downward pressure on property prices.

“We expect mortgage rates to fall slowly in the coming months,” said a spokesperson for Zoopla. “Once they get below 4.5%, we’ll see more buyers return to the housing market.” But with the average two-year fixed-rate mortgage currently at approximately 6.3%, this could take some time.

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; demand still tends to outstrip supply of homes in many areas across the UK. Plus, wages are rising even faster than inflation. Mortgage rates are also falling, meaning buyers are returning to the market. This means prices could fall rather than crash.

“Based on our current economic assumptions, we anticipate a gradual rather than a precipitous decline [in house prices],” said Kim Kinnaird, a mortgage director at Halifax.

How are mortgage rates affecting house prices?
Higher mortgage rates are making it more expensive to get a mortgage to buy a home. The extra financial pressure on buyers is forcing sellers to re-evaluate their asking prices if they want to make a sale.

Property prices have fallen for six months in a row, according to Halifax. The latest drop in asking prices recorded by Rightmove was the biggest for the month of November in a half a decade.

There are a number of factors that could see house prices fall:

Further rate rises are a possibility, which could see mortgage repayments increase even further
While inflation has fallen significantly, the cost of living crisis is still putting pressure on household budgets
First-time buyers are expected to hold off as they wait to see what happens
The Resolution Foundation think tank has said that if interest rates remain at the current high level then average house prices could plunge by 25%. This would take the average house price from £287,000 today to nearer £215,000.

However, the Bank of England decided not to raise the base interest rate in its September meeting. This could be an indication that mortgage rates could fall sooner than previously thought, which could see demand for homes increase again.

House prices have increased almost 20% from their pre-pandemic levels, so this would represent around a 5% fall since 2019.

The Resolution Foundation believes the adverse effects of the successive rate rises have yet to be fully felt, particularly by mortgage holders whose fixed term deals come to an end over the coming months.

What are the regional variations in house prices?
There are differences in house price movement depending on where you live within the UK. But every single regions saw an annual decline in the third quarter of 2023, according to September figures from Nationwide Building Society:

Northern Ireland fell by 1.8%
Wales dropped by 5.4%
England fell by 4.5%
Scotland dropped by 4.2%
London prices dropped by 3.8%
In London, house prices fell by 3.8% annually compared to the UK average of 4.7% in the third quarter of 2023. The average price of a home in the capital is still the highest in the UK at £514,325, compared to a UK average price of £260,181.

Average asking prices in the North are the cheapest in England at £156,051.

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 of average asking prices between 2020 and 2022 showed:

A detached property increased by 26%, or nearly £78,000
Flats increased by 13.4% on average, or £23,000
Figures from the Office for National Statistics show a slightly different trend, with semi-detached and terraced houses rising in price the most.

Is there a greater demand for rural locations?
With working from home 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 such as:

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.