After a pandemic-induced boom in the UK’s housing market, prices are starting to fall down as the Bank of England is hiking interest rates to curb rising inflation. Lower demand due to rising cost of living will result in a 8% price drop in the market next year according to Halifax bank.
According to a forecast made by Halifax, British house prices are set to drop by 8% in 2023. The bank, part of Lloyds Banking Group PLC, made the prediction based on economic projections by Lloyds that said rising mortgage costs and the broader cost of living crisis will push down house prices back to April 2021 levels.
The Royal Institution of Chartered Surveyors (RICS) released a report which said November saw the largest monthly fall in housing prices in 14 years. The number of inquiries for new houses from potential buyers fell for a fifth month in row, while sales fell to the lowest since May 2020 when the entire market was brought to a halt by the pandemic. Covid fueled a mini boom in the housing market as after months of being confined to their homes, people started to go after bigger properties in the rural areas. Low interest rates offered on borrowed funds by the Bank of England (BoE) over a period of 13 years also helped the market.
High demand and low mortgage rates shot up house prices to more than £17,000 in the first half of the year through to June. However, as inflation started to set in, the central bank raised interest in an effort to bring the economy under control, subsequently raising mortgages which caused many lenders to withdraw their fixed rates offers given to clients during the pandemic.
“Following such rapid house price growth, and the growing economic headwinds, a slowdown was almost inevitable. As the increasing cost of living puts more pressure on household finances and rising interest rates impact customers’ monthly mortgage payments, there’s understandably more caution among both buyers and sellers, which has seen demand soften as people take stock,” said Andrew Asaam, Homes Director at Halifax.
Halifax says that between the start of the pandemic in March 2020 and August of this year the average UK house price increased by £55,000 (23%) to a record high of £293,992. Currently, house prices in the country stands at £285,579, falling by 8% since the peak in August. This is still 13% higher compared to this time last year when the average price of homes were £272,778. As of this June, housing prices had a 12.5% increase, the strongest annual growth rate since 2005.
“Though the limited supply of properties for sale will continue to support prices, the pandemic-driven surge in demand has receded, and we’re emerging out of more than a decade of record low interest rates,” added Asaam.
However, the bank said the 8% drop forecast for next year is equated to the value of a typical UK house in April 2021, meaning homeowners would not lose all the gains they made during the pandemic wiped out.
In an interview given to The Guardian, real estate agent Chestertons’ head of research Sebastian Verity said that next year will be characterised by a slower market in which 25% fewer properties will be listed compared to a “normal year”. The Rishi Sunak government is working with banks to avoid additional stress on borrowers, so that the number of forced sales due to higher mortgage will be relatively small. The lack of supply combined with underlying demand will stop the market from any dramatic fall in prices.
Last week, the Bank of England raised its interest rate by 50 bps to 3.5% – the fastest and largest increase since 2008. UK inflation for November has dropped to 10.7% which is still at a 40-year high. The central bank says that inflation peaked at 11.1% in October and will start to fall starting this month. However, the cost of living crisis added with growing unemployment rate and lack of new investments will slow down economic growth and put the country in a prolonged recession until 2024.