"We expect to see prices fall by as much as 10% next year during a period of much reduced housing market activity."
After over two years of strong growth, the average UK house price is expected to fall by 10% in 2023 when interest rates peak, according to the latest analysis by Savills.
However, Savills says the prime markets will see smaller falls and outperform over the five year forecast period.
It predicts there will be a growing divergence between cash and equity rich or cash buyers and other groups in their ability to transact, and between the mainstream market and prime markets where housing wealth is most concentrated. As an example, prime central London values are expected to fall by just 2% in 2023 and rise by a net 13.5% by the end of 2027.
On the assumption that interest rates gradually ease back from the middle of 2024, Savills is forecasting that values will begin to recover and that the average UK house price will rise by 6% over the next five years.
This is expected to be accompanied by a fall in activity levels to a little under three quarters of the levels seen pre-pandemic, as first-time buyers and buy-to-let investors bear the brunt of increased affordability pressures next year, when Bank base rate is expected to peak at 4.0%.
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).
Savills continues to expect mainstream housing markets furthest from London, where mortgage affordability is least stretched, to be the strongest performers over their five year forecast period, with slightly less short term downward pressure on prices and more capacity for price growth during the recovery.
Meanwhile, the prime housing markets (broadly the top 5%-10% by value in each region) are expected to see smaller price falls and a stronger recovery than their mainstream counterparts, due to less reliance on mortgage debt. This will cushion them from the affordability concerns governing the mainstream markets, but they will not be completely immune to higher interest rates and weaker sentiment feeding upwards from lower price bands.
Prime regional markets, which have recorded unprecedented levels of price growth since the early days of the pandemic, are expected to see falls of 6.5% across the course of 2023, but a net gain of 10% on average in the five years to the end of 2027.
The difference between the prime and mainstream markets is expected to be most pronounced in prime central London where prices remain -18% below their 2014 peak, given relatively modest price growth of just 2.4% since March 2020.
The wider South, which includes the coastal hotspots of Cornwall, Devon and Norfolk, tends to see more cash buyers and so are likely to be more resilient. Similarly, the value gap between the Midlands, North and Scotland and wider commuter markets will leave greater capacity for growth, and so Savills expects them to be the strongest performing regions over the five years to 2027.
Lucian Cook, head of residential research at Savills, 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."
