The average UK house price is predicted to fall by 10% in 2023, real estate firm Savills says.
It points out that prices have risen by 24% since March 2020, but as the Bank of England base rate is forecast to rise to 4.0% at some point, this will have a serious knock-on effect.
The firm also says that rents will continue outpacing the growth in wages in the short term.
However, a return to house price rises is expected in 2024, totalling 18% from 2024-2027 with affordability pressures gradually easing.
London and the South East will see the largest falls
Homeowners and landlords in London and the South East will see the largest falls in the short term.
And, despite having the weakest performance over the next five years, prices here will lead market performance from 2027 onwards.
Savills is also predicting that transactions will fall below 900,000 in 2023 for the first time since 2011.
First time buyers and mortgaged buy-to-let investors will be the most affected, putting continued upward pressure on rental values.
The firm also warns that there will be a growing divergence between cash and equity-rich or cash buyers and other groups in their ability to transact.
‘Demand dynamics changed over the autumn’
Lucian Cook, Savills’ head of residential research, said: “The housing market has remained remarkably strong through the first nine months of 2022, but demand dynamics changed over the autumn with the realisation that the Bank of England would need to go faster and further to tackle inflation.
“Affordability will still come under real pressure as the effect of higher interest rates feeds into buyers’ budgets.
“That, coupled with the significant cost of living pressures, means we expect to see prices fall by as much as 10% next year during a period of much reduced housing market activity.”
‘Several factors that will insulate the market’
He added: “There are several factors that will insulate the market from the risk of a bigger downturn as seen after the financial crisis.
“Borrowers who haven’t locked into five-year fixed rates had their affordability heavily stress-tested until August this year.
“This, combined with relatively modest unemployment expectations and signs that lenders are looking to work with existing borrowers to help them manage their household finances, should limit the amount of forced-sale stock hitting the market next year.”
Mr Cook says that the Bank of England’s relaxation of mortgage regulation over the summer has substantially enhanced the prospect of a price recovery; but only as and when interest rates start to be reduced and once inflationary pressures in the wider economy ease.
On the PRS, he said: “Meanwhile, rental value growth will continue to outpace earnings growth in the short-term because of the pronounced imbalance between supply and demand, which will come as positive news to landlords already facing higher borrowing costs, but will put increasing pressure on struggling tenants.”