According to analysts at Capital Economics, in the next two years the continued increase in house prices in the past two years could be reversed by a fifth, as they suggest a fall in house prices by 5%.
While they forecast a fall in house prices for 2023 and 2024, for 2022, the independent economic research consultancy firm initially predicted that house prices would rise by 5%.
Given that already this year property prices have risen by 4%, they have now revised their forecast, predicting instead that house prices will rise by 9% by the end of this year.
Although the research has taken recent rises in interest rates into account, they still predict a sharp rise in house prices this year. This is because lenders have been slow to pass on rising interest rates to their consumers at the moment.
But also because of the lack of housing stock currently available.
Mortgage Rates To Rise With Interest Rates
However, they warn that soon lenders will have to raise their interest rates to keep making a profit from these loans. The analysts predict that rates on new mortgages will rise from 1.8% in the first quarter of 2022 to 3.3% by the end of this year.
With inflation expected to reach 10% later this year, they further expect interest rates to reach 3.6% in 2023, before they begin to fall again. From this, they forecast a fall in house prices of 5% by the end of 2024.
Chancellor Rishi Sunak has told cabinet ministers that he expects interest rates to rise by 2.5% in the next few months. He warned that this could lead to increased mortgage payments of £1,000 a year for some homeowners.
He warned ministers that if the Government borrowed more to fund public spending, then mortgage rates would inevitably go up further.
If governments, at a time like this, borrow lots and lots more money, and we’re already borrowing quite a lot, our own interest bill is ticking up, what that does is risks interest rates having to go up even more. That will just add to pressure for people with mortgage payments to make.Rishi Sunak, Chancellor of the Exchequer
Inflation & Rising Interest Rates Responsible For Fall In House Prices
Capital Economics identified the hike in inflation, which will lead to an increase in interest rate, as the main reason for the predicted fall in house prices over the next two years.
For 2023, their analysts forecast a 3% fall in house prices and 1.8% in 2014. However, they do not expect a housing market crash, like in 1990 and 2008, when prices fell by 20%.
First, while the house price-to-earnings ratio is roughly the same now as in 2007 we do not anticipate a return to pre-financial crisis mortgage rates of 6%, so the cost of mortgage repayments will remain much less of a burden. Second, strong pay growth means a modest fall in prices will be enough to return the house price-to-earnings ratio to a more sustainable level.Capital Economics
The first sign that the housing market is starting to slow down, according to analysts at Capital Economic, is that Google trends show that fewer people visit property websites. The number of visits is at its lowest level since May 2020.
Good News For The Housing Market
While sellers might be disappointed by a predicted fall in house prices in the next two years, buyers will welcome this prediction.
Because if the housing market cools down, the current imbalance of supply and demand will start to even out. This will give buyers a wider range of choice and will also ease the fierce competition between buyers.
A more balanced market will also help buyers not to rush into decisions out of fear of losing out. This could also reduce the high number of sales falling through.
Lower prices will also make properties more affordable for first-time buyers again, who might have been priced out due to the recent price hikes. And first-time buyers are vital to keeping the property market moving.
However, there is a chance that many buyers will decide to wait to purchase a new home until prices have started to fall. As a result, we could see a fall in demand quicker than anticipated.
Especially with the current cost of living crisis and uncertainty, many buyers will consider more carefully when making big decisions, like buying a house.
So while prices are still expected to rise by the end of this year, the market is predicted to slow down in the next two years and a fall in house prices will certainly be welcomed by buyers.