Why are house prices falling in the UK?

After a fall of 2.3% in November 2022, the UK is about to witness the largest drop in house prices since the beginning of the financial crash in 2008. This is due in part to high mortgage rates, which have caused sales to drop to a 12-year low, and will result in a significant decline in home values ​​in 2023.

House prices look set to continue to fall into 2023. (Photo by Jevanto Productions/Shutterstock)

There are many different predictions available as to the extent of the decline. For example, the research consultancies Capital Economics and Oxford Economics forecast a 12% decline in prices. On the other side, the Nationwide Building Society forecasts a 5% reduction, or in the worst case, a 30% decline.

In December 2022, furthermore, the Bank of England raised interest rates by 0.5 percentage points to 3.5%, the highest level in 14 years.

What happens when house prices drop?

People wishing to relocate will likely suffer the most negative effects of dropping house prices because there may be fewer options available. This is due to the fact that some sellers may decide to put their homes on the market later if they think they will get smaller returns for them now.

Along with that, a growing percentage of people will move from fixed-rate mortgages to new higher rates if interest rates stay high. Some homeowners may then decide to sell their houses after all if they can’t afford the increased mortgage rates.

The price drop in the property market has benefits and drawbacks. For instance, first-time purchasers may find homes that are more reasonably priced, enabling them to start out in the housing market. On the other hand, homeowners who stay there may suffer financial loss. Even worse, they can find themselves in a situation of negative equity, which happens when the amount borrowed exceeds the property’s current value.

How much will house prices fall?

“As rates normalize, buyers will increasingly recalculate their financial position and house prices will come under pressure. We expect a 10% decline over the next two years, taking them back to where they were in mid-2021,” Tom Bill, head of UK residential research at Knight Frank, told Money Week.

Given the previous two-year boom, Halifax projects an 8% drop in prices in 2023. For example, the average house price fell from £285,579 in November 2022 to £281,272 in December 2022.

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This is after the average UK property price increased by £55,000 (23%) to a new high of £293,992 during the beginning of the pandemic in March 2020 and again in August 2022.

Some other predictions follow Halifax’s footsteps: an 8% decline is forecast by Lloyds Bank, Pantheon Macroeconomics and the Center for Economics and Business Research.

Do rising interest rates cause house prices to drop?

A drop in home prices is not always a result of rising interest rates. But when interest rates rise sharply and persistently, property values ​​are quite likely to fall.

Higher borrowing rates will reduce housing market demand and lower home values. Rising interest rates make borrowing more expensive and have an influence on the property market.

The UK base rate has increased nine times since December 2021, from 0.1% to 3.5%. This has had a considerable impact on the cost of obtaining money for a mortgage. The base rate has not yet reached the 6% level that many analysts had predicted by the end of 2022, because of the bank’s attempts to control growing inflation.

On a more positive note, lenders are now offering cheaper fixed-rate mortgages as they grow more confident that the Bank of England’s base rate increases in 2023 won’t be as drastic as they had anticipated.

[Read more: Cities in England see a big fall in demand for homes]

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