The surge in interest rates has been one of the biggest shocks. The increase was larger than many foresaw, meaning that house prices have fallen further than we predicted last year. We forecast 0% growth for 2023. We now expect that the Office for National Statistics (ONS) House Price Index will show an overall decline of 2.5% across Great Britain in the final quarter of this year. The reality is, due to a lag in the time it takes for records to feed through and a change in their weightings this year, that this figure might underplay the price falls felt in some areas.
Even so, this is not the crash that the doomsters envisaged. Instead, some of the froth created during the post-Covid boom has been removed. We argue that the market is in the midst of a U-shaped slowdown, rather than the V-shaped crash of 2008, given that interest rates may stay higher for longer which we’ll see play out over the coming years. The cost of living has also risen more rapidly than anyone envisaged. The Bank of England regarded inflation as “transitory”, until it was forced to rethink this assessment and order 14 successive base rate rises. As a result of the surge in inflation, the ‘real’ terms fall in house prices in 2023 seems set to be -7.4%.
But the rental market has provided the greatest shock given the record-breaking rental growth recorded over the last 18 months. We forecast that rents will rise over four times faster than prices between now and 2026.
Transactions have taken a greater hit than property values as households faced with higher mortgage rates put relocation plans on hold. There have been few forced sales. Nevertheless, transactions are likely to total just under one million this year: in 2022, 1.22 million homes changed hands across Great Britain. Higher rates are likely to mean that there will be 1.2 million - 1.3 million completions in 2025 and 2026, rather than the 1.3 million-1.4 million we predicted as the new norm last year.
"Taking inflation into account, prices will have declined by close to 10% between the start of 2023 and the end of 2024"
In 2024 mortgage rates will continue to determine the tempo. It's looking likely that mortgage rates peaked in July 2023 and we expect these rates to continue falling gradually as lender pricing pre-empts Bank of England base rate cuts in Summer 2024. Based on current financial market expectations, we think the average 2-year fix will fall to around 5.4% by the end of 2024. Since real income growth and lower rates should slow price falls, we forecast annual growth of 0% by Q4 2024. This will be amplified by a distinct lack of housebuilding next year as developers are already scaling back.
We do not expect the forthcoming general election to have a major effect on the market in 2024, although the prospect of higher taxation could weigh more on the prime sector.
"The rental market has provided the greatest shocks given the record-breaking rental growth recorded over the last 18 months"
Taking inflation into account, prices will have declined by close to 10% between the start of 2023 and the end of 2024. Some of this decline will be reversed in 2025 when, as we forecast, prices will start moving upwards again as base rate cuts feed through to the cost of mortgages. Households will begin to contemplate relocation, having benefited from two years of above-inflation income growth which will ease affordability pressures.
We think that 2025 will mark the beginning of a new property market cycle, with London leading the way, outperforming all other regions for the first time since 2015. The pain of higher mortgage rates will be starting to disappear in 2026, which will spark price growth of 5.0% across Great Britain by the final quarter of the year. The average home will cost 5.5% more than it did at the end of 2022. But this will still represent a real-terms decline of 5% over that period.
The factors depressing prices are set to fuel the rent spiral. Since nearly 70% of landlords have a mortgage, with many on interest-only deals, they have fewer options available, and as a group they are some of the most exposed borrowers to higher rates. There has been no acceleration in landlord sales in 2023. But there is less incentive to invest in buy-to-let, with the result that there were 43% fewer homes available to rent in July than the same month of 2019.
The combination of a shortage of supply and mounting landlord costs means that we expect rents to rise by 25% across Great Britain between 2023 and 2026, with the largest increases during 2023 and 2024. As a consequence, it would be no surprise if the private rented sector becomes one of the most contentious housing issues in the general election.