House prices will fall 10% in 2023 due to higher mortgage rates, estate agent firm says

Savills has forecast a 10 percent drop in home prices next year, a significant cut from the one percent drop the real estate agency forecast in May.

Rising borrowing costs, driven in part by successive increases in the Bank of England’s base rate over the course of the year, will cause a market split between mainstream mortgage-backed properties and prime markets.

According to Savills, home prices in the mainstream market will take a bigger hit in 2023, dropping 10 percent over the course of the year before reaching 1 percent growth in 2024.

By the end of 2027, Savills expects prices to grow by 5.5 percent, slightly less than the 7.5 percent growth in 2026.

In its latest forecast in May, the brokerage firm had projected house prices to fall by just 1 percent in total next year, before making up for losses with a 1.5 percent rise in 2024.

Discrepancy: Average Home Prices Could Fall By 10% By 2023, Savills Says, But Key Markets (Regional Top 10 To 15% Of Real Estate) Will See A Less Pronounced Price Decline

Discrepancy: Average home prices could fall by 10% by 2023, Savills says, but key markets (regional top 10 to 15% of real estate) will see a less pronounced price decline

Prime markets are defined as generally the top 5-10 percent by value in any region and will see less depreciation next year and over a longer period of five years, according to Savills.

This is because buyers of these more expensive properties are less likely to depend on mortgages.

Outside of London, Savills said it expects prime properties to fall in value by 6.5 percent in 2023, but will increase in value by 10 percent by the end of 2027.

In the top market in central London, prices are expected to fall by 2 percent next year and rise by 13.5 percent by the end of 2027.

While grim, Savills’ latest predictions are less stern than others. Nationwide Chief Operating Officer Chris Rhodes told MPs that in the construction company’s worst-case scenario, home prices would fall by a third (about 30 percent), but in their base case, prices would fall by 8-10 percent in line with Savills.

In Nationwide’s latest home price index, Nationwide revealed that home prices fell for the first time this year in October, with the average home being worth 0.9 percent less in October than it was in September.

Decline: According To The Latest Forecast From Savills And Oxford Economics, Average House Prices On The Second-Hand Market Will Fall By 10% In 2023, Before Flattening Out Over The Next Four Years

Decline: According to the latest forecast from Savills and Oxford Economics, average house prices on the second-hand market will fall by 10% in 2023, before flattening out over the next four years

Lucian Cook, Savills’ head of residential research, said: “The housing market has remained remarkably strong for 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 on inflation.

A new prime minister and a turnaround in fiscal policy appear to have eased pressure on interest rates somewhat, but affordability will still come under real pressure as the effect of higher interest rates feeds into buyers’ budgets.

“That, combined with significant pressure on the cost of living, means we expect prices to fall by as much as 10 percent next year during a period of sharply reduced housing market activity.”

Cook added, however, that there were mitigating factors isolating the market from a larger fall in house prices.

Low unemployment rates and the increase in mortgage stress tests in recent months have reduced the chances of a more severe downturn, he said.

He further added that there was evidence that lenders wanted to work with existing borrowers to help them manage their household finances, which could reduce foreclosures.

However, a recovery in house prices after 2023 depends on interest rate cuts, according to Savills.

A one percent increase in house prices in 2024 will depend on the Bank of England’s key interest rate falling to 3.5 percent, while it is expected to hit 4 percent this year.

Looking ahead, Savills expects house prices to rise by 7 percent in 2026 if the key interest rate falls further to 1.75 percent.

The figures apply to homes on the second-hand market, not to new construction.

The base rate, set by the Bank of England’s Monetary Policy Committee, has been rising rapidly since December 2021 when it stood at just 0.1 percent. In September, the Bank raised interest rates to 2.25 percent in a bid to curb rising inflation and ease pressure on household finances.

In its most recent hike, the Bank raised the rate by 0.75 percent to 3 percent — the largest increase in 33 years.

However, the rise in interest rates has had a negative effect on mortgage holders as lenders have passed on the increase to borrowers.

The current average rate for a 2-year fixed mortgage across all deposit sizes is 6.46 percent, with the five-year average at 6.3 percent, 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 expiring, or because they have agreed to a home purchase, have been urged to act, but not to panic.

Banks and mortgage banks are still lending and mortgages are still being offered and applications are being accepted.

However, rates change quickly and there is no guarantee that deals will last and not be replaced by higher rate mortgages.

This is Money’s best mortgage interest calculator powered by L&C that can show you deals that match your mortgage and property value

What if I have to transfer?

Borrowers should compare rates and speak to a mortgage broker and be willing to trade to get a rate.

Anyone with a fixed-rate deal that expires within the next six to nine months should research how much it would cost to re-mortgage now — and consider taking on a new deal.

With most mortgage agreements, fees can be added to the loan and will not be charged until it is closed. By doing this, borrowers can secure a rate without paying expensive arrangement fees.

What if I buy a house?

Those with a home purchase should also aim to get rates as quickly as possible so that they know exactly what their monthly payments will be.

Home buyers need to be careful not to overburden themselves and be prepared for the possibility that house prices could fall from their current high levels as higher mortgage rates limit people’s borrowing capacity.

Compare mortgage costs?

The best way to compare mortgage costs and find the right deal for you is to talk to a good real estate agent.

You can use our best mortgage interest calculator to display deals that fit your home value, mortgage size, term and fixed interest needs.

However, keep in mind that rates can change quickly, so the advice is that if you need a mortgage to compare rates and then talk to a broker as soon as possible, they can help you find the right mortgage for you .

> Check out the best fixed rate mortgages you can apply for

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