Where will house prices go in 2023?

House prices started last year on a high, continuing an extended period of rapid growth that began early in the pandemic made possible thanks to a combination of stamp duty cuts, low-interest rates and the “race for space” throughout lockdowns. 

But the mood music started to change in the second half of 2022, leading buyers to start questioning their moving plans. 

Halifax’s latest house price index showed prices fell 1.5% in December, the fourth consecutive month of declines. In August, the average UK house price was £293,922, but in December the figure stood at £281,272 according to the lender. 

However, Rightmove’s latest house price index showed the average asking price for a property jumped 0.9% in January, up £3,301 from the month before. Meanwhile, The Office for National Statistics (ONS) showed house prices were up 10.2% in the year to November. 

But the headline figures don’t tell the full story. Rightmove’s numbers show a 0.9% increase following two months of falls, so the average asking price is actually £8,720 lower than it was in October. 

Similarly, the ONS said that despite the year-on-year increase, house price growth had slowed from 12.6% in October.

Meanwhile, Nationwide recorded its fourth consecutive monthly decline, with prices falling 0.1% in December. The decrease meant annual house price growth fell sharply from 4.4% in November to 2.8% in December. 

That’s the market’s “worst run since 2008, which left prices 2.5% lower than their August peak”, says Robert Gardner, Nationwide’s chief economist. 

Where will house prices go in 2023?

Both Lloyds and Halifax expect house prices to fall 8% in 2023, while Nationwide and online estate agent Zoopla are predicting falls of 5%. 

The Office for Budget Responsibility (OBR) expects prices to fall 9% over the next two years. 

However, Tom Bill, head of UK residential research at Knight Frank, argues: “The first rule for anyone predicting the trajectory of house prices in 2023 should be to ignore any data from the chaotic final quarter of 2022. 

The latest data shows two things are happening at the same time. First, the effect of the mini-Budget is working its way through the system, which means that monthly declines are narrowing. At the same time, an annual fall in house prices appears imminent, underlining how the lending landscape has changed irrespective of the mini-Budget. 

As rates normalise, 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.”

Financial market conditions do appear to have settled, but the mortgage market will take longer to normalise. UK Finance expects mortgage lending to fall 15% to pre-pandemic levels, and property transactions to fall by 21% next year. 

The Financial Conduct Authority (FCA) has warned over 750,000 households are at risk of defaulting on their mortgages over the next two years due to rising borrowing costs. These will especially affect those whose fixed-rate mortgages are coming to an end now. 

Karen Noye, a mortgage expert at Quilter, added: "While the phrase, what goes up must come down might be apt, Halifax also revealed that over the past 40 years house prices have gone up a staggering +974% since early 1983. 

Therefore, while it is likely that the cost pressures associated with the current economy will cause there to be a drop in house prices in the short to medium term when viewed through a historical lens a 10% or even 15% drop over the next few months would represent a minor blip in a housing market that has largely had a significant upward trajectory.

"That said, people will really start to feel the pinch from energy bills over the next few months and unless they simply can’t afford their bills and need to move, people are going to be much more cautious about tackling a move with all the expense that comes with it. This slowdown in the market and a potential increase in housing stock will at least during the start of 2023 likely to continue to depress prices.

“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.” 

In his first speech of 2023, prime minister Rishi Sunak said he expects inflation will halve this year. This could see mortgage rates drop.

"Without high inflation, the Bank of England will have less reason to keep raising interest rates, and this will feed into mortgage rates reducing. The best deals could be back to around 4.5% or 4% by the end of the year, and even lower after that assuming the direction of travel remains the same and we don’t have any other major economic or geo-political shocks," Noye added.

Why are house prices falling? 

A combination of factors is hanging over the UK housing market.  

Mortgage rates have increased exponentially over the last 12 months. They peaked at around 6.65% after Kwasi Kwarteng’s mini-budget pushed up the cost of borrowing.  

They have since come down to below 6%, falling over the last two months. The average two-year fix now stands at 5.6%, while the average five-year deal is 5.4% according to Moneyfacts. 

But when you consider the average two-year rate was around 2% at the end of 2021, rates are still much higher than they were. 

What’s more, it looks like the Bank of England (BoE) will push interest rates even higher. 

In the middle of December, the BoE raised interest rates to 3.5%, their highest since 2008, as it continues its battle against double-digit inflation. 

Although the latest figures seem to suggest inflation has peaked – CPI slowed for the second month in a row in December, coming in at 10.5% over the 12 months to the end of 2022 from a 41-year-high of 11.1% in October – cost of living pressures remain, driven by higher food and energy costs. 

This suggests the central bank may hike rates further in the months ahead as it tries to get inflation under control, putting further upward pressure on mortgage rates and, as a result, house prices.