UK house prices fall sharply, new five-year house price forecast shows – Property Industry Eye

Savills has issued a new five-year house price forecast for both the prime and mainstream markets. As borrowing costs rise, the housing market will diverge between the mortgage-dependent mainstream markets and prime markets, roughly the 5-10 percent in value in each region, the company says.

After more than two years of strong growth, the average UK house price is expected to fall by 10% in 2023 as interest rates peak, but the best markets will see smaller falls and outperform the five-year forecast period.

There will be a growing gap between cash and stock rich or cash buyers and other groups in their ability to trade, and between the mainstream market and the prime markets where housing wealth is most concentrated. As an example, prime central London values ​​are expected to fall by just -2% in 2023 and increase by a net 13.5% by the end of 2027.

Mainstream market:

Assuming that interest rates gradually ease back from mid-2024, Savills predicts that values ​​will begin to recover and that the average UK house price will rise by a net figure of +6% in nominal terms over the next five years.

This is expected to be accompanied by a fall in housing transactions to levels slightly less than three-quarters of the pre-pandemic norm, as first-time buyers and buy-to-let investors bear the brunt of increased price pressures next year, when the Bank’s base rate is expected to peak at 4 .0%.

By the end of the forecast period (2027), the average UK house price is expected to be £381,578, a gain of £22,290 over five years. This will put prices a significant £92,000 above the pre-pandemic level, after two and a half years of significant growth (+24% to the end of September).

Table 1: Mainstream Market Outlook and Economic Assumptions 2023-2027

	2023 forecast	2024 forecast	2025 forecast	2026 forecast	2027 forecast
Price growth in the UK	-10.0%	+1.0%	+3.5%	+7.0%	+5.5%
Transactions	870k	1,000k	1,110,000	1,110,000	1,110,000
Rent growth	+6.5%	+4.0%	+2.0%	+2.4%	+2.3%
GDP growth*	-0.5%	+1.8%	+2.7%	+2.1%	+1.6%
Unemployment*	4.6%	4.5%	4.1%	3.9%	3.8%
Bank base rate* (year-end)	4.0%	3.5%	2.5%	1.75%	1.75%

Source: Savills research, *Oxford Economics (Note: These projections are for average resale market prices. New construction values ​​may not move at the same rate.)

“The housing market has been remarkably strong in the first nine months of 2022, but demand dynamics changed in the autumn with the realization that the Bank of England would need to move faster and further to tackle inflation,” said Lucian Cook, head of Savill. housing research.

“A new Prime Minister and fiscal policy turnarounds appear to have eased some of the pressure on interest rates, but affordability will still come under real pressure as the impact of higher interest rates feeds into buyers’ budgets. That, along with significant pressure on the cost of living, means we expect to see prices fall by as much as 10% next year during a period of much reduced activity in the housing market.

“There are several factors that will insulate the market from the risk of a major downturn as seen after the financial crisis. Borrowers who haven’t locked into five-year fixed rates had their affordability severely stress-tested until August this year. This, combined with relatively modest unemployment expectations and signs that lenders want to work with existing borrowers to help them manage their household finances, should limit the amount of foreclosures coming to market next year.

“And looking longer term, the Bank of England’s easing of mortgage policy over the summer has significantly raised the prospect of a price recovery; but only if and when interest rates begin to come down, as inflationary pressures in the wider economy ease.

“Meanwhile, rental value growth will continue to outpace profit growth in the short term due to the pronounced supply-demand imbalance, which will come as positive news for landlords already facing higher borrowing costs, but will put increasing pressure on struggling tenants. “

Regional variation – mainstream

Savills continues to expect the mainstream housing markets furthest from London, where mortgage prices are least stretched, to perform the strongest over its five-year forecast period, with somewhat less near-term downward pressure on prices and more capacity for price growth during the recovery.

Table 2: Normal Regional Price Forecasts*

Area	2023 forecast	2024-2027 forecast	Total 5 years to 2027
northwest	-8.5%	+22.1%	+11.7%
Yorks & The Humber	-8.5%	+22.1%	+11.7%
North East	-8.5%	+22.1%	+11.7%
Wales	-8.5%	+21.4%	+11.1%
Scotland	-9.0%	+20.3%	+9.5%
East Midlands	-9.0%	+19.7%	+8.9%
West Midlands	-9.0%	+19.7%	+8.9%
Southwest	-10.0%	+18.0%	+6.2%
Southeast	-11.0%	+15.7%	+3.0%
East of England	-11.0%	+15.7%	+3.0%
London	-12.5%	+12.3%	-1.7%
the UK average	-10.0%	+18.0%	+6.2%

Source: Savills Research (Note: These forecasts are based on average secondary market prices. Newly built values ​​may not move at the same rate.)

“Historical trends suggest that, at least from a geographic perspective, we are about halfway through the second half of a housing market cycle,” said Frances McDonald, Savills research analyst. “And we expect cyclical factors, closely linked to affordability, to continue to dominate the regional distribution of economic growth over the next five years.

“However, regional price growth is expected to converge around the UK average by the end of our forecast period as the value gap narrows, potentially putting London and the South East back in a position to deliver the strongest house price growth from 2027 onwards.”

The upper end of the market to be most resilient

Meanwhile, prime housing markets (broadly the top 5-10% in value in each region) are expected to see less price declines and a stronger recovery than their mainstream counterparts, due to less reliance on mortgage debt. This will cushion them from the affordability issues that rule the mainstream markets, but they will not be completely immune to higher interest rates and weaker sentiment feeding upward from lower price ranges.

Table 3: Regional outlook for the primary market 2023-2027

	March 2020 – September 2022	2023 forecast	2024 forecast	2025 forecast	2026 forecast	2027 forecast	5 years to 2027 forecast
Prime central London	2.4%	-2.0%	2.0%	5.0%	4.0%	4.0%	13.5%
Outer prime London	6.4%	-7.0%	0.0%	3.5%	6.0%	4.0%	6.1%
All top regionals	16.4%	-6.5%	2.0%	3.0%	6.0%	5.5%	9.9%

Source: Savills Research (Note: These forecasts are based on average secondary market prices. Newly built values ​​may not move at the same rate.)

The divergence between the prime and mainstream markets is expected to be most pronounced in prime central London where prices remain -18% below the 2014 peak, given relatively modest price growth of just +2.4% since March 2020.

“The rarefied market in prime central London postcodes continues to look good in historical terms, particularly in the context of the weaker pound and strong dollar,” McDonald said.

“A price recovery in this market seems long overdue. This will help protect it from more significant price falls, although it is increasingly looking like a stronger price recovery will not materialize in earnest before 2025, given on the global economic background and the prospects for a British general election in 2024.”

The top regional markets, which have seen unprecedented levels of price growth since the early days of the pandemic, are expected to see falls of 6.5% over the course of 2023, but a net gain of 10% on average over the five years to the end of 2027.

The wider south, which includes the coastal areas of Cornwall, Devon and Norfolk, tends to see more cash buyers and is therefore likely to be more resilient. Similarly, the value gap between the Midlands, North and Scotland and wider commuter markets will leave greater capacity for growth, and therefore Savills expects them to be the best performing regions in the five years to 2027.