House prices will fall by around 9 per cent between the end of this year and September 2024, according to the Office of Budget Responsibility (OBR).
The change, which follows a period of record highs, will be driven by rising mortgage rates and tougher economic conditions.
The OBR’s Economic and Fiscal Outlook report, published alongside the Chancellor’s Autumn Statement, says that the average interest rates on outstanding mortgages will peak at 5 per cent in the second half of 2024.
This is the highest average rate since 2008 and 1.8 percentage points above the peak that the OBR predicted in its March forecast. The average rate will then fall slightly to 4.6 per cent by 2028 when the forecast ends.
Ups and downs: The OBR has said that house prices will fall 9% next year before rising again into 2026 and beyond
However, the forecast notes that because of the relatively large share of fixed-rate mortgages (around 83 per cent in the second quarter of 2022 compared to just 51 per cent in 2007), higher rates on new mortgages take time to feed through to the averages.
As the economy recovers, the OBR says house prices will rise slightly faster than incomes from 2025 (at around 2.6 per cent a year) and the house-price-to-earnings ratio will settle at around 7.
The forecasts are based on quarterly peak-to-trough measurements, which predict the the highest and lowest house price growth figures in each three-month period.
This is a slightly more upbeat than prediction from estate agency Savills which has forecast house prices will fall 10 per cent next year before rising by 1 per cent in 2024.
As recently as May, the estate agent was forecasting just a 1 per cent drop in 2023 but the sharp increase in mortgage rates has led to a gloomier outlook.
Rate rises: Mortgage rates climbed rapidly in the second half of the year but are set to ease off in the coming years according to the OBR
However, the OBR did add a caveat to its prediction, adding ‘there is significant uncertainty over this forecast given the sensitivity of house prices to mortgage rates and the recent volatility in the bond yields that drive pricing in the mortgage market.’
In its financial years data the OBR predicts house prices will fall 4.2 per cent in 2023-24 and 4.0 per cent in 2024-25, before rebounding to 2.1 per cent growth in 2025-26.
House price growth fell to 9.5 per cent in September from 13.1 per cent in August, according to the latest ONS figures.
Where are mortgage rates heading?
Following the September mini-Budget gilt yields shot up, pushing up the cost of borrowing for banks.
In response lenders hiked up their own mortgage rates, ensuring they weren’t caught short by the steep increase in the cost of credit by passing it on to their customers.
Before the mini-Budget on Friday 23 September the average two-year fixed rate across all loan-to-value brackets was 4.74 per cent and the five-year fix was 4.75 per cent, according to Moneyfacts.
Today those are 6.23 per cent and 6.04 per cent respectively. However, both two and five year fixed rates have come down from last month’s peak of 6.65 per cent and 6.51 per cent for two-year and five-year fixed rate averages.
Going down: Mortgage rates have continued to fall since mid-October with the average two-year fixed rate now 6.23% across all LTVs according to Moneyfacts
And rates are continuing to fall. Skipton Building Society has now launched a three-year fixed rate deal at 60 per cent loan-to-value with a rate of 5.03 per cent.
The Co-operative Bank has a two-year fixed rate mortgage at 80 per cent LTV for 5.89 per cent.
Higher mortgage rates and falling house prices are two of the trends the OBR says will weigh on consumption and investment in the UK.
The ongoing squeeze on real incomes and rising interest rates will also contribute to tipping the economy into a recession lasting just over a year from the third quarter of 2022, it said.
In his Autumn Statement Hunt said his fiscal plan will mean the recession will be ‘shallower and shorter’ than previously forecast.
In a surprise move Hunt announced that the stamp duty cut introduced by former Chancellor Kwasi Kwarteng in his ill-fated mini-Budget in September is only temporary and will end on 31 March 2025.
Kwarteng had cut raised the house price threshold under which buyers don’t have to pay stamp duty land tax from £125,000 to £250,000.
It meant home movers would save up to £2,500, and 200,000 more homebuyers every year would pay no stamp duty at all.
But today, announced the increased tax relief will be phased out from spring next year.
Find out how much stamp duty you would pay under the current system below.