Savills forecasts a 10% fall in the average UK house price
With the Bank of England expected to increase Bank base rate later today, Savills has issued new five-year house price forecasts, predicting that the average UK house price will fall by 10% in 2023 when interest rates peak.
However, the firm added that the prime markets will see smaller falls and outperform over the five year forecast period.
Savills has said that growth will resume in 2024, totalling 18% from 2024-2027 as affordability pressures gradually ease (net +6% over 5 years).
Mainstream London and the South East are set to see the largest falls in the short term and the weakest 5-year performance, allowing them to lead performance from 2027 onwards.
Savills has predicted that transactions will fall below 900,000 in 2023 for the first time since 2011. First time buyers and mortgaged buy-to-let investors are set to be the most affected, putting continued upward pressure (+6.5% in 2023 and +18% over 5 years) on rental values.
By end of the forecast period (2027), the average UK house price is expected to be at £381,578, a £22,290 gain over five years. This will put prices a significant £92,000 above the pre-pandemic level, following two and a half years of considerable growth (+24% to the end of September).
Lucian Cook, Savills head of residential research, said: “The housing market has remained remarkably strong through the first nine months of 2022, but demand dynamics changed over the autumn with the realisation that the Bank of England would need to go faster and further to tackle inflation.
“A new prime minister and fiscal policy U-turns appear to have reduced some of the pressure on interest rates, but affordability will still come under real pressure as the effect of higher interest rates feeds into buyers’ budgets. That, coupled with the significant cost of living pressures, means we expect to see prices fall by as much as 10% next year during a period of much reduced housing market activity.
“There are several factors that will insulate the market from the risk of a bigger downturn as seen after the financial crisis. Borrowers who haven’t locked into five-year fixed rates had their affordability heavily stress-tested until August this year. This, combined with relatively modest unemployment expectations and signs that lenders are looking to work with existing borrowers to help them manage their household finances, should limit the amount of forced-sale stock hitting the market next year.
“And looking longer term, the Bank of England’s relaxation of mortgage regulation over the summer has substantially enhanced the prospect of a price recovery; but only as and when interest rates start to be reduced, once inflationary pressures in the wider economy ease.
“Meanwhile, rental value growth will continue to outpace earnings growth in the short-term because of the pronounced imbalance between supply and demand, which will come as positive news to landlords already facing higher borrowing costs, but will put increasing pressure on struggling tenants.”
Commenting on the Scottish market, Cameron Ewer, Savills Head of Residential in Scotland, added: “The Scottish prime market has seen a significant shortage of stock for some time in many locations, so there’s a good deal of pent up buyer demand at this level of the market. We believe the appetite to secure the right house will remain, supporting transaction numbers. However we anticipate offers may be closer to home report valuation, rather than at the high premiums we’ve become used to in recent times.
“Since the mini budget, the market has been relatively strong, particularly in the family homes markets in Edinburgh and Glasgow and also in traditional country hotspots. These have been less impacted by chains, and less reliant on mortgage funding. Price falls will also have less impact here, due to the strength of their local economies, quality of life and the value gap they offer compared to London and the south east.”