OBR Predict Fall In House Prices In 2023

23rd November 2022

Economist Tejvan Pettinger looks at the probable fall in UK housing prices following the Office for Budget Responsibility's forecasts.

Last Thursday the OBR published a detailed forecast for the UK economy. It made for grim reading - the longest recession for a generation, falling disposable income and real wage growth around 35% less than its pre-crisis trend rate.

Amongst the dire economic predictions, the OBR forecast house prices in the UK would fall 9% in 2023 and not recover their current level of around £290,000 until Q4 2027 - which could mean at least four years without house price growth.

Another interesting feature of the OBR forecast is how much has changed since their earlier March 2022 forecast. You can see that in March, the forecast was only for a brief stagnation before resuming their upward trend. But, seven months later, this outlook has become much more pessimistic. From this, we could summarise two things.

Firstly economic forecasts often prove to be inaccurate (or at least need frequent updating)
Secondly, a lot has changed in UK economy and housing market in recent months

It is true that wealth has accumulated in the past decade. And around 36% of homes are now owned outright or with small mortgage balances. These homeowners will remain largely unaffected by rising interest rates and house price-to-income ratios. Also, these homeowners are in a position to help their children get on the market. This is one reason house price to incomes ratios have risen in long-term.

However, in short-term at least, a key factor in determining prices is the number of first time buyers coming onto the market. If the number of buyers fall then it puts downward pressure on prices. The fact many millions are happy to hold onto their homes doesn't change this.

The high-interest rates, combined with falling real incomes and economic uncertainty, mean the number of people wishing to take the first step into the market will fall. New Buyer enquiries have fallen sharply in the past month, and are likely to keep falling over the winter.

Sellers may respond by taking their house off the market, and waiting for conditions to improve, this will limit price falls. Certainly, the number of transactions is likely to fall in 2023. Residential transactions are also predicted to fall, from 1,243,000 in 2022 to 1,051,000 next year.

Also, the new expectations of falling prices, are another reason first time buyers may wait.

However, the number of homes owned outright, and high level of wealth is a factor which will prevent any kind of collapse in prices.

See the whole blog HERE