What’s next for the UK housing market?

The UK housing market enjoyed a prolonged boom, but rising interest rates have pushed mortgage rates up to levels not seen since the 2008 financial crisis. It doesn’t seem likely things will change anytime soon. Will house prices come down in 2023?

Woman looking in an estate agent's window
House prices fell 0.1% in September, but remain 9.9% higher than a year ago.
(Image credit: © Martin Pope/Getty Images)

The UK housing market looks in for a very bumpy ride. Average interest rates for two- and five-year mortgage rates have hit over 6% for the first time since the financial crisis.

Fixed interest rates expire on about 2.4 of the 8.4 million mortgages in Britain in the second half of this year and throughout next year, according to UK Finance. Seeing as mortgage rates have more than doubled over the last year, borrowers coming off their fixed deals might be in for a shock when they come to refinance.

Indeed, the average rate on a two-year fix has risen from 4.74% on 23 September to 6.53% on Tuesday this week. What’s more, over 40% of mortgage products were pulled from the market amid the chaos, says comparison site Moneyfacts.

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UK housing market faces further pressure

The increase in mortgage rates comes despite intervention from now-chancellor Jeremy Hunt, who undid most of Kwasi Kwarteng’s mini-Budget earlier this week in an attempt to calm markets. But the damage had already been done, and rates will probably go up again on 3 November when the Bank of England’s Monetary Policy Committee meets again.

All of these changes are likely to have a big impact on the housing market. A year ago, a £200,000 five-year fixed mortgage would cost a borrower £800 a month. Today, the same buyer could only borrow £130,000.

About 35% of property hunters buy in cash and are not directly affected, but even these people may rely on someone else in the transaction chain who does need a loan.

The bad news continues. Mortgages only look set to get more expensive. UK housing prices have surged over the last decade thanks to low interest rates and cheap borrowing.

However analysts predict interest rates will climb to as much as 6% by next year, and some are expecting the BoE to push them up by a whole percentage point when they next meet which would take them to 3.25%.

Will house prices come down in 2023?

The monthly cost to service an 80% loan-to-value mortgage on the average priced house as a share of median full-time disposable income has historically been “under 40%”, says Andrew Wishart of Capital Economics.

Yet with mortgage rates at 6%, that figure is now about 60%. If the base rate peaks at 5% then “we expect nominal house prices to fall by 12% between now and mid-2024”.

Should mortgage rates stay stuck at 6% for a prolonged period then “a house price fall of 25% would be needed” to bring affordability down to the long-term average.

Similarly, Simon French of Panmure Gordon predicts that average house prices will fall 14% over the next three years or 29% in real terms.

Such a fall would take the inflation-adjusted average price for UK houses back to a level last seen in 2013 when the Help to Buy programme was instigated. Given the scale of global monetary tightening, “the coming years look… similar to... the early 1990s”.

The stamp duty cuts survived Hunt’s culling of the Kwarteng-Truss mini-Budget, and could incentivise some buyers. But whatever savings they make there will inevitably be eaten up by more expensive mortgage payments. The increased expense could prompt some first-time buyers to delay getting on the property ladder altogether.

UK housing market might be starting to slow

Halifax’s latest House Price Index showed prices fell 0.1% in September, and have been “largely flat since June”. However the bank pointed out they are still 9.9% higher than they were a year ago.

Meanwhile, data from the Office for National Statistics showed prices had increased 13.6% over the year to August. The average home now costs around £296,000, a £36,000 increase from the same month last year. But growth did slow, from 16% in July.

“Today’s data confirms that house price growth remained resilient over the summer. However, it may be some time until we have the data to analyse the volatility felt by the UK housing market in the last few weeks,” says Malcolm Webb, technical director at Legal & General Surveying Services. “The fast-moving nature of today’s market also makes it extremely challenging to forecast which way house prices will go next.”

Nicole García Mérida

Nic studied for a BA in journalism at Cardiff University, and has an MA in magazine journalism from City University. She joined MoneyWeek in 2019.