UK House Prices In 2023 - Falling House Prices Predicted

22nd January 2023

Economist Tejvan Pettinger discusses what the future may hold for UK house prices with other countries seeing dramatic falls.

Since their peak in August 22, UK House prices have fallen 5%, but the big question is how much will they fall in the next 12 months? Expert predictions range from a modest 2% decline to a fall of 12% from Capital Economics.

Why has the market turned so quickly and could the house price correction be even worse than forecasts predict?

Rising interest rates is the main factor behind the pessimistic predictions for the UK market. Mortgage rates have soared from under 2% to nearly 6% in just a few months.

For a £200,000 loan, this increases the interest cost from £4,680 to £12,020. Or from another perspective, the amount a typical buyers can borrow has fallen 35%.

It is true interest rates have been much higher in the past, but that is only part of the story. House prices are simply much more expensive. In 1991, average prices were £55,000 compared to £265,000 today. To put into perspective the average UK deposit for first-time buyers is now £60,000 more than average prices in 1991.

The key metric is how affordable mortgage payments are. As a share of take-home pay, mortgage payments have risen from 28% to 40% and could go even higher in 2023. At this kind of mortgage payment, many would be buyers just can't afford. Even though renting is expensive, rising interest rates make it relatively cheaper than a mortgage for the first time in many years.

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