House prices soared 14% in the last 12 months, how far will they fall?

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With inflation now into double figures, with all the financial shenanigans over the mini budget, the 10 year risk free bond yield at around 5 percent, it’s sending mortgages rates above 6 per cent, so how low will house prices go?

It seems inevitable prices will fall, but by how much? UK house price growth has seen an unbroken steady rise over many years, with the ONS recording a month by month increase since May 2012.

The steady growth has underwritten the success of buy-to-let investing, even though income yields have generally come down, this comforting capital growth has ensured a solid total return.

Neither Brexit nor the pandemic managed to derail this comfort zone for the average buy-to-let investor who saw the sector, a safe secure asset class, ideal for providing their pension nest egg. But all good things financial have a habit of coming to an end, and this time it took Kwasi Kwarteng’s mini-budget to finish off the rises, though things had been heading in that direction in any case.

Of course this was inevitable. Inflation had been rising steadily, accelerated by Putin’s invasion of Ukraine, a steady fall in the stock markets, and the value of the pound collapsing, especially against the US dollar. Much of UK imports are priced in the USDs, so oil, and a good deal of food and consumer durables become much more expensive to import. The country is so much poorer that it was just two years ago, so the question is, how far will UK property prices fall and for how long?

Housing shortages

Generally house prices are well supported by a shortage of housing and particularly in the private rented sector, so the slow down and fall may be tempered by that, but most property experts are predicting a price drop of between 5 and 15 per cent.

What the experts think

Knight Frank have come out with a forecast of a double-digit downturn, the property agent is predicting that house prices will fall by around 10 per cent over the next two years.

Although 2022 will see prices to have risen by 6 per cent, the agency thinks they will fall 5 per cent in 2023 and another 5 per cent in 2024 – a two year decline triggered by the spike in mortgage interest rates.

Senior personal finance analyst at interactive investor, Myron Jobson, has been quoted as saying:

“There is a clear and obvious lag between the latest official data on house prices and what is happening in the property market at present.

“More up-to-date house price indices paint a picture of a housing market that is running out steam, with rising mortgage rates and the escalating cost-of-living crisis cooling demand for homes.”

And head of UK residential research at Knight Frank, Tom Bill, has said:

“It’s a fairly safe bet that UK house prices have now peaked.

“The impact of rising mortgage rates will begin to hit demand and spending power in coming months, which we believe will lead to a fall of 10% over the next two years for UK prices.

“We may see mortgage rates fall to some extent if financial markets become more reassured by the government’s economic plan but the events of the last fortnight have been a reminder that the era of ultra-low rates is coming to an end.”

Credit Suisse and Capital Economics agree: both are forecasting a fall of between 10 per cent and 15 per cent, though property agents’ multi-franchise operator Belvoir (BLV), has said that although the combination of rising interest rates and the rising cost of living will put pressure on personal budgets, current mortgage levels were not high enough to reduce prices at all.

But, “If interest rates continue to rise, it is likely that asking prices may fall by between 5 and 10 per cent next year,” a Belvoir spokesperson told Investors’ Chronicle. “If, however, interest rates on fixed-term mortgages remain at their current levels, it is likely that prices will remain static and may even increase by 2 to 3 per cent.”

Meanwhile enquires by the Investors Chronicle found Savills (SVS) saying there will be “downward pressure” on house prices but wouldn’t be drawn to a figure until after the Bank of England’s (BoE) rates meeting on 3 November, and likewise property agents CBRE would not commit to a figure, though it “expect[s] the UK residential market to slow in 2023”.

Property agents JLL predict that house prices will drop over the course of next year and that it will come out with a number “in a week or two”. It thought that transactions are likely to drop 30 per cent in the short term. “The basket of properties that does transact will include a higher proportion of motivated sellers interacting with opportunistic buyers,” said JLL’s head of residential and living research, Nick Whitten.

Risk of recession

Interest rates coupled rising inflation, and sky high energy prices are the drivers of this decline leading to the risk of a recession are. Home buyers and home movers as well as potential new buy-to-let investors will find it increasingly difficult to finance new purchases.

Conversely, whereas most homebuyers and many buy-to-let investors use mortgages to buy homes, the decline could be a major buying opportunity for cash buyers, given the buoyancy of demand for rentals.

Experts are predicting that the Bank of England will continue to raise interest rates in a bid to kill off persistent inflation, where the bank base rate could increase from its present 2.25 per cent to as high as 6 per cent next year.

Consumer price index (CPI) inflation has now reached 10.1% for the 12 months to September 2022, the highest level for 40 years. It will take time to tame the beast with higher interest rates, and in the meantime one group of workers after another will strive to maintain their standard of living at the expense of the rest, fighting for a share of an ever decreasing pie.

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