Current UK house price growth (YoY): -1.1%

House price inflation over 2024: 2%

Housing sales in 2024: 1 million

Increased mortgage rates and the impact of rising living costs have dampened buyer demand. The first half of 2023 witnessed a resurgence in demand as mortgage rates declined to approximately 4%. However, a subsequent rise in borrowing costs during the summer has once again curtailed demand. Demand is now 20% lower on an annual basis and 25% below the five-year October average. As a result, there has been a significant deceleration in price growth, moving from a positive 9.2% a year ago to a negative 1.1% at present. Other indices, primarily based on mortgage lending, have recorded more substantial annual declines, while the Office for National Statistics House Price Index showed a meagre 0.2% increase in July.

The Southern regions of England have experienced the most significant price reductions thus far, but this trend is spreading to other areas. Our localised house price indices indicate that four out of five housing markets are now witnessing annual price declines, a stark contrast from less than one in twenty just six months ago. These price drops are generally modest, typically in the low single digits, with no markets reporting annual price falls exceeding 5%. However, in the coming months, we anticipate some markets will start to show annual price declines exceeding 5% as prices continue to adjust to reduced purchasing power.

At the postal area level, the most substantial annual price declines have been observed in Colchester (CO), where prices are 3.5% lower over the year. This is followed by Canterbury, Luton, and Brighton, all of which are commuter areas to London. In contrast, prices in Halifax (HX) have risen by 3.6% compared to a year ago, and prices in the Motherwell (ML) postal area in Scotland are 2.4% higher.

House prices have defied expectations of more substantial declines in 2023. The economy is still showing signs of growth, albeit at a slow pace, and unemployment remains low, with rising incomes. Lenders are actively helping customers with refinancing, which has limited the number of distressed sellers in the market.

The introduction of stricter mortgage affordability testing since 2015 has also added resilience to the housing market. This regulation prevented households from taking on unsustainable levels of debt, even during periods of very low mortgage rates, which, in the past, could have driven house prices much higher and made significant double-digit price declines more likely once demand weakened.

Even though new mortgage borrowers may have secured loans at just 2% interest rates, they were required to demonstrate their ability to afford rates as high as 7% to their banks. This means that most mortgage holders can manage higher rates when they refinance. However, presently, banks are stress-testing new borrowers at rates of 8-9%, despite the borrowers paying 5%, exacerbating the reduction in purchasing power and impacting sales.

The housing market is still on course for a 23% decrease in home relocations throughout 2023, with the total number expected to be 1 million. Numerous households are either postponing their moves or are unable to afford home purchases at mortgage rates exceeding 5%. The decline in sales is consistent across various regions and property types.

A recent survey revealed an increased reluctance to move, with many citing uncertainties and the expectation of further price drops. However, half of the respondents indicated that their intentions to move had not changed, and 15% expressed an increased eagerness to relocate.

Looking ahead to the following year, we anticipate the typical seasonal resurgence in demand next spring as pent-up demand returns to the market. Nevertheless, the current sales pipeline is smaller compared to the same period last year. Additionally, general elections typically result in a pause in market activity, which is why we expect another year with 1 million home relocations in 2024. There may be an uptick in sales if mortgage rates decline more rapidly towards 4%.

Increased mortgage rates have had an impact on the number of transactions involving borrowers reliant on mortgages. Meanwhile, the volume of cash sales remains stable. First-time buyers (FTB) appear to be positioned as the largest buyer group for 2023, closely followed by cash buyers. In the past five years, cash buyers represented 1 in 5 sales, a figure that has now risen to 1 in 3 sales in 2023.

Although the share of sales accounted for by first-time buyers has declined compared to recent years, it remains substantial due to the persistent growth in rental costs, which continues to drive demand. In markets with more affordable housing prices, the mortgage payments for first-time buyers are lower than rental expenses, even at mortgage rates of 5.5%.

It's evident that there are segments of the population eager to move, but in 2023, many have been taking a wait-and-see approach, particularly regarding the expected direction of mortgage rates and house prices.

The concern of a significant price collapse is diminishing, shifting the focus of home-buying decisions more toward people's financial capacity and willingness to move when mortgage rates are in the 4-5% range. It remains uncertain how many individuals are anticipating or waiting for mortgage rates to drop further. Concurrently, household budgets have been strained by escalating living costs and inflation eroding income growth. Finally, there is a reversal in this trend, with real income growth becoming pivotal to sustaining demand.

We anticipate that cash buyers will continue to be a prominent buyer group in 2024, alongside first-time buyers, as the rapid rise in rents persists. Higher mortgage rates tend to have a more pronounced impact on those looking to upsize, as they seek larger homes and require larger mortgages. Upsizers may need to be more flexible in their choices of what and where to buy, as they often have a fixed idea of their next purchase location, overlooking other areas that may meet their needs. If there is an increase in upsizing buyers in the market in 2024, this could support overall sales volumes.

While the likelihood of a substantial price drop is minimal, improving housing affordability is essential to rekindle buyer interest and boost sales volumes. In addition, households need to gain more confidence in the economic outlook. UK house prices have experienced smaller declines than anticipated throughout 2023. Coupled with 5% mortgage rates, this means that by the end of 2023, housing in the UK will remain relatively costly.

The chart provided below illustrates our assessment of whether house prices are currently overvalued or undervalued over time. It's a cautious evaluation, based on our estimation of what an average UK household could reasonably spend on a typical home compared to actual prices. It highlights periods of overvaluation, notably in the late 1980s and leading up to the global financial crisis in 2007, followed by house price declines in subsequent economic downturns.

The primary factor behind the current overvaluation in property values has been the significant rise in mortgage rates over the past 18 months. To reset affordability and stimulate demand and sales, house prices may need to decline further, while incomes should increase, or mortgage rates must decrease.

In our forecasts, we anticipate that mortgage rates will drop to 4.5% by the close of 2024 and remain at that level through 2025. According to our projections, UK house prices are expected to experience an average decline of 2% in 2024. With the number of homes available for sale at a five-year high, sellers will likely need to competitively price their properties if they are genuinely committed to selling. This competitive pricing environment is expected to keep pressure on housing prices.

A swifter increase in household incomes in 2024 will enhance affordability, although housing is anticipated to remain slightly overvalued by the end of the year. The situation could change if households opt for longer mortgage terms, which would alleviate this overvaluation. The trajectory of mortgage rates and how lenders assess affordability throughout 2024 will be pivotal for the housing market's outlook. The Bank of England is predicting that inflation will reach its target in the first half of 2025, so a faster decline in mortgage rates during 2024 could bolster sales and pricing.

The housing market is adapting to the impact of increased borrowing costs by experiencing reduced sales, rather than witnessing a substantial drop in house prices. Simultaneously, asset prices globally are adjusting to the rise in borrowing costs. There is an ongoing debate within financial circles regarding the long-term outlook for borrowing costs, which significantly influences UK mortgage rates. It's widely acknowledged that we are unlikely to return to the era of extremely low borrowing costs, given that central banks are phasing out policies that provide cheap financing to support economies in the aftermath of the global financial crisis and during the pandemic.

Although mortgage rates of 4-5% are still historically low, they are higher compared to recent years. Assuming that mortgage rates remain at this level, we anticipate that UK house price declines will remain in the low single digits for the next 1 to 2 years, which will be below the projected growth in household incomes. This, in turn, will lead to a decrease in the house price-to-income ratio to levels not witnessed in a decade. Such a scenario is likely to set the housing market up for a resurgence in activity, as consumers gain confidence to make substantial purchasing decisions. We anticipate this resurgence in activity in the first half of 2024, as individuals who had delayed moving due to the spike in mortgage rates decide to reenter the market.

80% - Housing markets recording price declines compared to the previous year

32% - The proportion of sales attributed to cash buyers (2023)

-2% - House price inflation in the UK (2024)

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