By According to reports by Halifax and Nationwide Building Society, house prices in the UK are falling at the fastest rate in 14 years. Interestingly it is a huge change from the dramatic price surge registered during the coronavirus pandemic. Understandably, it can be confusing for ordinary sellers, buyers, and new investors. Here is a comprehensive overview of the reasons behind the downward trend in house prices to put everything into perspective.
The Current State of Housing and House Prices in the UK
Average property values across the UK have dropped by about £14,000 from one year ago, according to a report by Halifax. Overall, about 80% of all housing markets reported declines in prices compared to 2022.
Interestingly, certain areas experienced higher price falls than others. The East of England registered the highest annual price decline, measured at about -2.7%. The Southeast and Southwest also registered relatively high declines, measured at 2.4% and 2.2%, respectively. More particularly, Southampton, Portsmouth, Cambridge, Aberdeen, and certain parts of Norfolk and Kent registered the highest declines.
However, it is worth noting that house prices fell in certain parts of the UK in contrast to the downward trend. In Particular, prices in Northern Ireland and Scotland rose by 2.1% and 1.3%, respectively.
Technically, Prices Should Have Fallen Further
Ideally, house prices should have fallen even further following the BOE’s drastic hike of the Bank Rate from 0.1% to 5.25% in two years. Normally, buyers wouldn’t afford mortgages to purchase homes, causing house prices to fall even further.
However, the fall in house prices can be explained by several factors. Most notably, the labour market’s strength, coupled with the high growth in average earnings, has been instrumental in cushioning price falls. Additionally, many lenders have been patient with mortgage holders, limiting the number of forced sellers.
Interestingly, the tighter affordability testing policies instituted in 2015 also helped protect mortgage holders against the shock of rising interest rates. To this end, while interest rates were as low as 1.3% in 2021, borrowers still had to prove that they could manage rates as high as 7%.
Why are House Prices Falling?
The decline in house prices across most of the UK is driven by natural market forces. It mostly comes down to demand, supply, and the effects of rising interest rates.
Rising Interest Rates
The rising Bank Rate has driven mortgage interest rates upwards, making mortgages unaffordable. To this end, mortgage rates peaked at about 6.11% in July, up from about only 1.3% in 2021. This dramatic increase in interest rates has made mortgages unaffordable, essentially locking potential buyers out of the market.
Moreover, banks have been tightening their affordability testing requirements, further limiting access to mortgages. For example, only 15% of new borrowers can get mortgage amounts more than 4.5 times their salaries.
High Supply vs. Low Demand
Naturally, prices go down when supply exceeds demand. Interestingly, while demand for houses is growing in the UK, supply is also higher. Overall, there are about a quarter more houses available for sale compared to last year. To this end, it is essentially a buyer’s market, and many houses are selling at about £18,000 less than the asking price average.
Economic Uncertainty
The UK economy has been in turmoil since the coronavirus pandemic. It has affected many people’s incomes and expenditures, making them cautious about buying property and other large investments. Currently, many potential buyers are waiting to see how the economy turns out before committing to buying, reducing demand, and sustaining the already high supply.
What the Future Holds
The UK housing market is still overvalued by 10-15%, according to Zoopla. To this end, industry experts predict that house prices will continue falling in 2024 and 2025. This is despite the falling interest rates, making mortgages more affordable and spurring more buyers to join the market.
However, the price decline rate will slow down going into 2024 and 2025, considering the expected rise in demand. To this end, Halifax estimates that prices will fall by about 2% by the end of 2024.
Conclusion
House prices are registering a sharp decline across more than 80% of the UK housing market. Rising interest rates, a cautious economic outlook, and a high supply relative to demand are behind the falling house prices in the UK. Interestingly, prices will continue falling in 2024 and 2025, albeit gradually.
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