When will house prices
fall?
The
UK property market boom might soon be over, as experts predict that the cost-of-living
crisis could cause a house price correction.
Currently the market is overheated. Property prices have increased by an
average of 11% over a year. This makes it increasingly difficult for first-time
buyers to get a foot on that elusive first rung of the property ladder.
In this article we explain:
- Why house prices are
currently so high
- What you can expect
to pay for a home in the UK
- Will house prices
crash in 2022?
- House price
predictions
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The average UK house price rose by £25,000 in the year to August, says
the ONS
Why are UK house prices so high?
The average price of a UK home has nearly trebled since the turn of the
century.
On the surface, it looks like the main long-term driver has been simple
supply and demand: a shortage of housing stock compared to high demand for
properties.
While this is a factor, the Bank of England says its record-low interest
rates have really been powering the housing market.
Rates have been at rock bottom for more than a decade and were at a
record low of 0.1%. The Bank of England has increased the base rate four times
since December in response to soaring inflation and it is currently at 1%.
However, it’s still relatively cheap to borrow money to buy a home so
the housing market hasn’t been affected yet.
But further rises are expected throughout 2022, which could dampen
the housing market as it means mortgage repayments will increase.
The cost-of-living crisis is likely to be the biggest cause of a
slowdown in the housing market. As household budgets come under pressure, fewer
people can afford to stretch themselves to buy homes.
It’s through that some first-time buyers could hold off as they wait to
see what happens to the market.
The Covid-effect
Since the onset of the Covid crisis, low interest rates have been joined
by three other important factors in driving house price growth:
- The stamp duty holiday
- People
wanting to relocate
- Desire
for bigger homes with more space
But what is the trajectory from here – will house prices drop?
Average house prices in the UK
Growth in average house prices in the UK gathered pace in the second
half of 2020, a trend that has continued throughout 2021 and into this year.
It had been expected that the end of the stamp duty holiday and furlough
in October 2021 would result in less demand for house purchases, but that has
not been the case. In March 2022 UK house prices grew at the fastest pace since
2004.
However, growth has since decreased somewhat. Data from Nationwide
building society has shown an annual increase of 12.1% in April and 11.2% in
May, indicating a slowdown.
Nationwide says the price of an average home is now £269,914. This is
more than a fifth higher than at the start of the pandemic, or around £30,000
higher than May 2021.
Meanwhile mortgage lender Halifax has also confirmed that house prices
appear to be slowing. It says the average house price was £289,099 in May,
10.5% higher than a year ago.
When looking at monthly data, prices increased 1% between April and May.
Nationwide and Halifax differ in their house price estimates because the
representative properties they track are slightly different.
We have more on how to avoid paying too much for a house.
What are the regional variations?
There are a number of regional variations when it comes to house prices,
and some areas remain highly competitive.
- House
price growth is slowest in London
- But
prices in the capital are still the highest in the UK at almost £520,000 –
almost double the UK average
- Wales
is growing faster than any other region or area in the UK, with growth of
more than 15% year-on-year
Meanwhile prices of large, family homes are growing faster than flats.
Prices for detached and semi-detached houses have risen 12% over the past year,
compared to 7% growth for flats, said Halifax.
Is there a greater demand for rural locations?
With working from home likely to be a more permanent part of many
people’s lives, demand for properties outside cities and commuter belts has
jumped.
Lockdowns highlighted the value of greenery and space, triggering a
surge of interest in properties in rural and coastal areas, according to ONS statistics.
House prices in some hotspots have risen at three times the national
rate. These include places like:
- Conwy
in North Wales
- North
Devon
- Richmondshire
in the Yorkshire Dales
Estate agents report significant interest in rural and
remote properties in Scotland.
Will house prices crash in 2022?
While we can’t say for sure what the future holds for the UK housing
market, a crash seems very unlikely.
This is because there is still plenty of demand and a short supply of houses,
which has driven up house prices for years.
However, there are a few factors that could put a dampener on the recent
spectacular growth, namely the cost of living crisis. Record petrol and energy prices,
alongside rising inflation and tax rises mean most households have less disposable
income to spend on buying houses.
If demand slows down then the rate of house price growth could also
fall.
So, while a crash seems unlikely, the squeeze on household finances as a
result of the cost-of-living crisis means we could see a significant slowdown
in house price growth as the year goes on.
House price predictions
Given the continued “race for space”, many housing market predictions
remain bullish:
- Hamptons
house price forecast predicts a rise of 3.5% each year between 2022 and
2024
- Lloyds
Banking Group expect house prices to maintain their current strong levels
over the next year, but growth to be much flatter through 2022 at around
1%
- Property
consultancy Cluttons suggest that in some parts of London, prices could
fall by as much as 10% next year while Foxtons predict growth of 1 to 3%
in the capital
In the short-term the property market is expected to continue
its upward trend. However, high inflation will push interest rates up which
will slow the housing market down by the end of the year and into 2023.
Analysis from Capital Economics predicts that the Bank of England base
rate will peak at about 3% in the second half of 2023, in turn pushing average
mortgage rates to 3.6%. While still historically low, that is more than double
the 1.6% rate recorded at the end of 2021.
Based on this data, Capital Economics has forecast house prices to rise
throughout 2022, before falling by 5% in 2023.
Russell Galley, managing director of Halifax, said the prospect of
increasing pressure on households’ finances could cause growth to slow.
“The headwinds facing the wider economy cannot be ignored. With interest
rates on the rise and inflation further squeezing household budgets, it remains
likely that the rate of house price growth will slow by the end of this year.”
The
Times Money Mentor
15th
June 2022