Savills has forecast a 10 per cent fall in house prices next year, a significant downgrade from the one per cent drop the estate agency predicted in May.
Increasing borrowing costs, driven in part by successive Bank of England base rate rises over the year, will cause a market split between mainstream mortgage-dependent properties and prime markets.
In the mainstream market house prices will take a greater hit over 2023, according to Savills, falling 10 per cent over the year before ticking up to 1 per cent growth in 2024.
By the end of 2027 Savills expects prices to be growing by 5.5 per cent, down slightly from 7.5 per cent growth in 2026.
In its last forecast in May the estate agency had predicted house prices overall would drop by just 1 per cent next year, before recovering the losses with a 1.5 per cent rise in 2024.
Discrepancy: Average house prices could fall by 10% in 2023, says Savills, but prime markets (the top 10-15% of properties regionally) will see a less pronounced fall in prices
Prime markets are defined as broadly the top 5-10 per cent by value in each region and will see less of a fall in values next year and over a longer five year period, according to Savills.
This is because buyers of these more expensive properties are less likely to rely on mortgages.
Outside of London, Savills said it expected prime properties to fall in value by 6.5 per cent in 2023 but see their values increase by 10 per cent by the end of 2027.
In the prime market in central London prices are expected to fall 2 per cent next year before rising 13.5 per cent by the end of 2027.
While stark, Savills’ latest forecasts are less severe than others. Nationwide’s chief operating officer Chris Rhodes told MPs that the building society’s worst case scenario sees house prices falling by a third (around 30 per cent), however their base case sees prices drop by 8-10 per cent in line with Savills’.
In its latest house price index, Nationwide revealed that house prices fell in October for the first time this year, with the typical home worth 0.9 per cent less in October than it was in September.
Going down: The latest forecast by Savills and Oxford Economics sees average house prices in the second hand market falling 10% in 2023, before levelling off over the next four years
Lucian Cook, Savills head of residential research, says ‘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.
‘A new prime minister and fiscal policy U-turns appear to have reduced some of the pressure on interest rates, but 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 per cent next year during a period of much reduced housing market activity.’
However, Cook went on to add that there were mitigating factors insulating the market from a bigger house price drop.
Low unemployment figures and the increase in mortgage stress testing over the past few months have reduced the likelihood of a more severe downturn, he said.
Furthermore, he added that there were indications that lenders were looking to work with existing borrowers to help them manage their household finances, which could reduce the number of forced sales.
However, a house price recovery after 2023 is reliant on interest rates being reduced according to Savills.
A one per cent rise in house prices in 2024 depends on the Bank of England base rate falling to 3.5 per cent, when it is currently forecast to hit 4 per cent this year.
Looking ahead Savills expects house prices to rise 7 per cent in 2026 if the base rate drops further to 1.75 per cent.
The figures apply to homes in the second hand market, and not new builds.
The base rate, set by the Bank of England’s Monetary Policy Committee, has been rising rapidly since December 2021 when it was just 0.1 per cent. In September the Bank pushed up the rate to 2.25 per cent, in a bid to curb rising inflation and reduce pressures on household finances.
In its most recent rise the Bank increased the rate by 0.75 per cent to 3 per cent – the single biggest increase for 33 years.
However, the increase in interest rates has had an adverse effect on mortgage holders as lenders have passed on the rise to borrowers.
The current average rate for a 2-year fixed mortgage across all deposit sizes is 6.46 per cent, with the five-year average at 6.3 per cent, according to Moneyfacts.
What to do if you need a mortgage
Borrowers who need to find a mortgage because their current fixed rate deal is coming to an end, or because they have agreed a house purchase, have been urged to act but not to panic.
Banks and building societies are still lending and mortgages are still on offer with applications being accepted.
Rates are changing rapidly, however, and there is no guarantee that deals will last and not be replaced with mortgages charging higher rates.
This is Money’s best mortgage rates calculator powered by L&C can show you deals that match your mortgage and property value
What if I need to remortgage?
Borrowers should compare rates and speak to a mortgage broker and be prepared to act to secure a rate.
Anyone with a fixed rate deal ending within the next six to nine months, should look into how much it would cost them to remortgage now – and consider locking into a new deal.
Most mortgage deals allow fees to be added the loan and they are then only charged when it is taken out. By doing this, borrowers can secure a rate without paying expensive arrangement fees.
What if I am buying a home?
Those with home purchases agreed should also aim to secure rates as soon as possible, so they know exactly what their monthly payments will be.
Home buyers should beware overstretching themselves and be prepared for the possibility that house prices may fall from their current high levels, due to higher mortgage rates limiting people’s borrowing ability.
How to compare mortgage costs
The best way to compare mortgage costs and find the right deal for you is to speak to a good broker.
You can use our best mortgage rates calculator to show deals matching your home value, mortgage size, term and fixed rate needs.
Be aware that rates can change quickly, however, and so the advice is that if you need a mortgage to compare rates and then speak to a broker as soon as possible, so they can help you find the right mortgage for you.
> Check the best fixed rate mortgages you could apply for
Read more at DailyMail.co.uk