Will UK house prices come down?

Over the past few years house prices have been continuously rising. But now, since the interest rates have skyrocketed, house prices seem to be dropping slightly. There are a number of key factors that determine if house prices remain high or fall over a period of time, we’ll talk about these here. 

Wage growth and inflation play a major part in consumer confidence. They determine whether

someone is willing to buy their first home or put an existing house on the market. The cost of living increased dramatically in the UK with inflation at 11.1% in October 2022 before easing off to 7.9% in June 2023. This is still relatively high and certainly has affected the affordability of goods and services generally. In order to keep inflation under control the Bank of England has had to increase interest rates and this has affected the mortgage rates.

If interest rates are relatively low, people can afford to spend more as the cost of borrowing is lower. This tends to push house prices up. However, if rates go up, mortgages become more expensive and house prices tend to fall. 

Indeed, this has recently been the case as we now have interest rates higher than they’ve been for ten years. This has left the Office for Budget Responsibility predicting that house prices will fall by around 10% by the end of 2024. 

It is also expected that house prices will fall by around 5% this year and by approximately the same next year. This is the result of inflationary pressures in the economy which have proven to be more problematic than expected for the Bank of England, leading it to be very cautious about reducing interest rates anytime soon. 

What happens in the housing market and with house prices is linked to the ever-increasing mortgage interest rates because the Bank of England has had little choice but to raise mortgage interest rates, leading to a drop of approximately 18% up to July 2023 in housing sales according to Zoopla. 

This is because many people now think that it is too risky at the moment to take the plunge and enter the housing market during these turbulent economic times especially as there is no guarantee that interest rates won’t rise further to curb inflation during the rest of 2023 and into 2024. The situation is also going to get worse for many homeowners as they come off their low fixed-rate agreements and may find it difficult to remortgage with a new higher-rate deal.

Local house prices will vary and are determined by how desirable a location is. For example, higher mortgage prices are having a detrimental effect on house prices in the south of England, particularly in commuter belt markets adjacent to London, whereas the following areas have seen falls: Southend (-1.5%), Watford (-1.2%) and in North West Hertfordshire (-1.1%). 

However, this is not the picture across the whole of the UK. For example in Halifax and the Humber area, house prices actually increased by approximately 4.3%. Local factors such as the building of a new housing estate will also reduce the value of houses nearby as there will be greater competition for buyers. 

Some properties will still command a premium because they are in sought-after areas where housing stock is limited. Overall, the Nationwide House Price Index for July 2023 showed an annual house price fall of -3.8% which is down from -3.5% in June 2023. 

Economists expect further reductions this year and next in house prices, especially as the Bank of England announced a further rise of 0.25% on 3 August 2023, and from 1 September 2023 another increase from 6.50% to 6.75%, which will hit consumer spending power and confidence even more.

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