House Prices Set to Fall

Wooden houses next to an easel with a downwards pointing graph
Author: Samuel Beckingham
Updated: Mar 15, 2023
4 minutes read

How much a house is worth is being reevaluated by buyers. According to Halifax, house prices have increased by 2.1% in the year to February. Nationwide, however, gives a more negative result at a 1.1% reduction. While house prices have been rising faster than wages, market analysts are expecting a sharp fall to come in 2023.

Thanks, in part, to the Bank of England’s intervention with raising the interest rate to calm soaring inflation, mortgage rates have suffered. By making home purchasing more expensive, house prices have fallen six months in a row. Further interest rate rises are expected to come in the next few months, raising mortgage repayments even further.

Another factor affecting house prices is the ever-present cost of living crisis. By slowing down demand in the sector, people have less spare money to put towards a house purchase. Some experts even believe first-time buyers may wait to see how the market fares before they make a purchase. Even homeowners might look to sell in a year’s time instead of accepting a lower offer, which is exactly what happened in 2008.

First-time buyers fuel the market, generating a boom in property sales due to various benefits and discounts they can make use of. Nationwide found that the average first-time buyer mortgage payments are now at 39% of monthly income, which is the highest it’s been since 2008.

A recent survey from the Royal Institution of Chartered Surveyors found that 60-70% of all properties were sold for less than their asking price in February. According to Zoopla, the average reduction from the asking price was 4.5%. The demand for family homes is quite high, while supply is close to the lowest levels the market has ever seen.

Despite Halifax’s analysis of an increase in house prices, the bank said it would not be wise to rule out significant price drops. Further interest rate increases and cost of living pressures are sure to lead to further price drops, but the market is incredibly uncertain. Households are currently paying more of their income on their mortgage than they have been since 1989, and this is at a time when inflation is running close to a 40 year peak.

Tomasz Wieladek, Chief European Economist at T Rowe Price, believes house prices will fall 10-15% from their peak. Although it’s hard to predict what might happen for the rest of the year, with further interest rate hikes comes a greater risk that demand will be greatly reduced. This will have the effect of lowering house prices.

Amidst all the crises and rising costs found everywhere, households are only gathering smaller deposits, which will stall the rate of house price growth. Despite all these factors pointing towards a crash, there is still reasonably high demand for housing, which could act as a buffer to values. This way, there will be more of a fall in prices rather than a crash, but only time can tell. The housing market may struggle to gain momentum when wages are failing to keep up with inflation and economic growth is shrinking.